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 a complex analysis 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.
Is Veracyte Inc (NASDAQ:VCYT) a superb investment right now? Prominent investors are in an optimistic mood. The number of long hedge fund bets increased by 3 recently. Our calculations also showed that VCYT isn’t among the 30 most popular stocks among hedge funds. VCYT was in 17 hedge funds’ portfolios at the end of the fourth quarter of 2018. There were 14 hedge funds in our database with VCYT holdings at the end of the previous quarter.
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 32 percentage points since May 2014 through March 12, 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.
Let’s take a glance at the recent hedge fund action regarding Veracyte Inc (NASDAQ:VCYT).
Hedge fund activity in Veracyte Inc (NASDAQ:VCYT)
Heading into the first quarter of 2019, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 21% from the previous quarter. By comparison, 12 hedge funds held shares or bullish call options in VCYT a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
Among these funds, Cannell Capital held the most valuable stake in Veracyte Inc (NASDAQ:VCYT), which was worth $21.3 million at the end of the fourth quarter. On the second spot was Millennium Management which amassed $17.8 million worth of shares. Moreover, Renaissance Technologies, Clough Capital Partners, and Royce & Associates were also bullish on Veracyte Inc (NASDAQ:VCYT), allocating a large percentage of their portfolios to this stock.
As one would reasonably expect, key hedge funds were leading the bulls’ herd. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, initiated the most outsized position in Veracyte Inc (NASDAQ:VCYT). Marshall Wace LLP had $2.9 million invested in the company at the end of the quarter. D. E. Shaw’s D E Shaw also made a $2.2 million investment in the stock during the quarter. The other funds with brand new VCYT positions are Michael Castor’s Sio Capital and Phil Frohlich’s Prescott Group Capital Management.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Veracyte Inc (NASDAQ:VCYT) but similarly valued. We will take a look at Hoegh LNG Partners LP (NYSE:HMLP), Luther Burbank Corporation (NASDAQ:LBC), Foresight Energy LP (NYSE:FELP), and SI-BONE, Inc. (NASDAQ:SIBN). All of these stocks’ market caps match VCYT’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HMLP | 7 | 21022 | 2 |
| LBC | 6 | 27473 | 1 |
| FELP | 3 | 771 | 0 |
| SIBN | 9 | 69929 | 9 |
| Average | 6.25 | 29799 | 3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.25 hedge funds with bullish positions and the average amount invested in these stocks was $30 million. That figure was $73 million in VCYT’s case. SI-BONE, Inc. (NASDAQ:SIBN) is the most popular stock in this table. On the other hand Foresight Energy LP (NYSE:FELP) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Veracyte Inc (NASDAQ:VCYT) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on VCYT as the stock returned 83% and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.
