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 Total Return Index ETFs returned 27.5% through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 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 Quaker Chemical Corp (NYSE:KWR).
Is Quaker Chemical Corp (NYSE:KWR) a cheap investment today? Money managers are becoming hopeful. The number of bullish hedge fund positions inched up by 5 lately. Our calculations also showed that KWR isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). KWR was in 18 hedge funds’ portfolios at the end of the third quarter of 2019. There were 13 hedge funds in our database with KWR holdings at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Chuck Royce of Royce & Associates
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s go over the recent hedge fund action encompassing Quaker Chemical Corp (NYSE:KWR).
Hedge fund activity in Quaker Chemical Corp (NYSE:KWR)
Heading into the fourth quarter of 2019, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 38% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in KWR over the last 17 quarters. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
More specifically, Royce & Associates was the largest shareholder of Quaker Chemical Corp (NYSE:KWR), with a stake worth $123.8 million reported as of the end of September. Trailing Royce & Associates was Citadel Investment Group, which amassed a stake valued at $10 million. Marshall Wace, Millennium Management, and Holocene Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Royce & Associates allocated the biggest weight to Quaker Chemical Corp (NYSE:KWR), around 1.15% of its 13F portfolio. Welch Capital Partners is also relatively very bullish on the stock, earmarking 0.07 percent of its 13F equity portfolio to KWR.
With a general bullishness amongst the heavyweights, specific money managers have jumped into Quaker Chemical Corp (NYSE:KWR) headfirst. Marshall Wace, managed by Paul Marshall and Ian Wace, assembled the biggest position in Quaker Chemical Corp (NYSE:KWR). Marshall Wace had $7.5 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also made a $2.7 million investment in the stock during the quarter. The following funds were also among the new KWR investors: Paul Tudor Jones’s Tudor Investment Corp, Joel Greenblatt’s Gotham Asset Management, and Michael Gelband’s ExodusPoint Capital.
Let’s check out hedge fund activity in other stocks similar to Quaker Chemical Corp (NYSE:KWR). These stocks are Navistar International Corp (NYSE:NAV), Iridium Communications Inc. (NASDAQ:IRDM), MGE Energy, Inc. (NASDAQ:MGEE), and GATX Corporation (NYSE:GATX). This group of stocks’ market caps are closest to KWR’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NAV | 23 | 1132856 | -3 |
| IRDM | 16 | 138343 | 4 |
| MGEE | 13 | 54289 | 0 |
| GATX | 15 | 214366 | 2 |
| Average | 16.75 | 384964 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $385 million. That figure was $154 million in KWR’s case. Navistar International Corp (NYSE:NAV) is the most popular stock in this table. On the other hand MGE Energy, Inc. (NASDAQ:MGEE) is the least popular one with only 13 bullish hedge fund positions. Quaker Chemical Corp (NYSE:KWR) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately KWR wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on KWR were disappointed as the stock returned -5.4% during the fourth quarter (through the end of November) 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 this year.
Disclosure: None. This article was originally published at Insider Monkey.
