Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves.
Texas Pacific Land Trust (NYSE:TPL) investors should be aware of an increase in hedge fund interest lately. Our calculations also showed that TPL isn’t among the 30 most popular stocks among hedge funds (view the video below).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, 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. We’re going to take a look at the latest hedge fund action encompassing Texas Pacific Land Trust (NYSE:TPL).
What have hedge funds been doing with Texas Pacific Land Trust (NYSE:TPL)?
At the end of the second quarter, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of 45% from the previous quarter. The graph below displays the number of hedge funds with bullish position in TPL over the last 16 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
The largest stake in Texas Pacific Land Trust (NYSE:TPL) was held by Horizon Asset Management, which reported holding $1409.4 million worth of stock at the end of March. It was followed by Polar Capital with a $46.5 million position. Other investors bullish on the company included White Elm Capital, Arrowstreet Capital, and Beddow Capital Management.
As industrywide interest jumped, key money managers have been driving this bullishness. Serengeti Asset Management, managed by Jody LaNasa, assembled the most outsized position in Texas Pacific Land Trust (NYSE:TPL). Serengeti Asset Management had $2.4 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also made a $1.9 million investment in the stock during the quarter. The other funds with new positions in the stock are Till Bechtolsheimer’s Arosa Capital Management, Ken Grossman and Glen Schneider’s SG Capital Management, and Eric Sprott’s Sprott Asset Management.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Texas Pacific Land Trust (NYSE:TPL) but similarly valued. We will take a look at KT Corporation (NYSE:KT), Adaptive Biotechnologies Corporation (NASDAQ:ADPT), Algonquin Power & Utilities Corp. (NYSE:AQN), and Tallgrass Energy, LP (NYSE:TGE). This group of stocks’ market values are closest to TPL’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| KT | 19 | 320612 | 0 |
| ADPT | 38 | 3181443 | 38 |
| AQN | 9 | 63964 | -3 |
| TGE | 13 | 47232 | 2 |
| Average | 19.75 | 903313 | 9.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $903 million. That figure was $1516 million in TPL’s case. Adaptive Biotechnologies Corporation (NASDAQ:ADPT) is the most popular stock in this table. On the other hand Algonquin Power & Utilities Corp. (NYSE:AQN) is the least popular one with only 9 bullish hedge fund positions. Texas Pacific Land Trust (NYSE:TPL) 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 TPL wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); TPL investors were disappointed as the stock returned -17.5% 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.
