It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. The Standard and Poor’s 500 Index returned approximately 12.1% in the first 5 months of this year (through May 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. 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 Zymeworks Inc. (NYSE:ZYME).
Is Zymeworks Inc. (NYSE:ZYME) a great investment now? Hedge funds are becoming more confident. The number of long hedge fund positions improved by 3 recently. Our calculations also showed that ZYME isn’t among the 30 most popular stocks among hedge funds.
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’ 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.
Let’s take a peek at the new hedge fund action encompassing Zymeworks Inc. (NYSE:ZYME).
What have hedge funds been doing with Zymeworks Inc. (NYSE:ZYME)?
At the end of the first quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of 27% from the previous quarter. On the other hand, there were a total of 2 hedge funds with a bullish position in ZYME a year ago. With the smart money’s sentiment swirling, there exists a few noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
Among these funds, 0 held the most valuable stake in Zymeworks Inc. (NYSE:ZYME), which was worth $35 million at the end of the first quarter. On the second spot was Baker Bros. Advisors which amassed $27.6 million worth of shares. Moreover, Farallon Capital, Vivo Capital, and Perceptive Advisors were also bullish on Zymeworks Inc. (NYSE:ZYME), allocating a large percentage of their portfolios to this stock.
As one would reasonably expect, specific money managers were leading the bulls’ herd. Rubric Capital Management, managed by David Rosen, assembled the most outsized position in Zymeworks Inc. (NYSE:ZYME). Rubric Capital Management had $2.6 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $2 million position during the quarter. The following funds were also among the new ZYME investors: Paul Marshall and Ian Wace’s Marshall Wace LLP and Jeffrey Jay and David Kroin’s Great Point Partners.
Let’s go over hedge fund activity in other stocks similar to Zymeworks Inc. (NYSE:ZYME). We will take a look at Rosetta Stone Inc (NYSE:RST), e.l.f. Beauty, Inc. (NYSE:ELF), EZCORP Inc (NASDAQ:EZPW), and Transenterix Inc (NYSE:TRXC). This group of stocks’ market values are closest to ZYME’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| RST | 19 | 126725 | 7 |
| ELF | 18 | 117892 | 1 |
| EZPW | 20 | 116774 | 0 |
| TRXC | 13 | 10958 | 5 |
| Average | 17.5 | 93087 | 3.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $93 million. That figure was $121 million in ZYME’s case. EZCORP Inc (NASDAQ:EZPW) is the most popular stock in this table. On the other hand Transenterix Inc (NYSE:TRXC) is the least popular one with only 13 bullish hedge fund positions. Zymeworks Inc. (NYSE:ZYME) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on ZYME as the stock returned 13.2% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
