Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like PhaseBio Pharmaceuticals, Inc. (NASDAQ:PHAS).
Is PhaseBio Pharmaceuticals, Inc. (NASDAQ:PHAS) worth your attention right now? Money managers are in an optimistic mood. The number of long hedge fund positions increased by 4 lately. Our calculations also showed that PHAS isn’t among the 30 most popular stocks among hedge funds (see the video below). PHAS was in 8 hedge funds’ portfolios at the end of June. There were 4 hedge funds in our database with PHAS positions at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s take a peek at the new hedge fund action surrounding PhaseBio Pharmaceuticals, Inc. (NASDAQ:PHAS).
What have hedge funds been doing with PhaseBio Pharmaceuticals, Inc. (NASDAQ:PHAS)?
At Q2’s end, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 100% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards PHAS over the last 16 quarters. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Kris Jenner, Gordon Bussard, Graham McPhail’s Rock Springs Capital Management has the number one position in PhaseBio Pharmaceuticals, Inc. (NASDAQ:PHAS), worth close to $18.7 million, comprising 0.7% of its total 13F portfolio. The second largest stake is held by Cormorant Asset Management, led by Bihua Chen, holding a $11.9 million position; 0.7% of its 13F portfolio is allocated to the stock. Other peers that are bullish consist of James E. Flynn’s Deerfield Management, Farallon Capital and Nathan Fischel’s DAFNA Capital Management.
As industrywide interest jumped, key hedge funds have been driving this bullishness. Deerfield Management, managed by James E. Flynn, established the most valuable position in PhaseBio Pharmaceuticals, Inc. (NASDAQ:PHAS). Deerfield Management had $11.2 million invested in the company at the end of the quarter. Farallon Capital also made a $9.9 million investment in the stock during the quarter. The other funds with new positions in the stock are Jerome Pfund and Michael Sjostrom’s Sectoral Asset Management, Hal Mintz’s Sabby Capital, and Anand Parekh’s Alyeska Investment Group.
Let’s now review hedge fund activity in other stocks similar to PhaseBio Pharmaceuticals, Inc. (NASDAQ:PHAS). We will take a look at Brightcove Inc (NASDAQ:BCOV), Tekla World Healthcare Fund (NYSE:THW), Quad/Graphics, Inc. (NYSE:QUAD), and NextCure, Inc. (NASDAQ:NXTC). This group of stocks’ market values are closest to PHAS’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BCOV | 18 | 142351 | 3 |
| THW | 1 | 510 | 0 |
| QUAD | 16 | 26719 | -6 |
| NXTC | 8 | 92180 | 8 |
| Average | 10.75 | 65440 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $65 million. That figure was $59 million in PHAS’s case. Brightcove Inc (NASDAQ:BCOV) is the most popular stock in this table. On the other hand Tekla World Healthcare Fund (NYSE:THW) is the least popular one with only 1 bullish hedge fund positions. PhaseBio Pharmaceuticals, Inc. (NASDAQ:PHAS) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately PHAS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); PHAS investors were disappointed as the stock returned -68.2% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.