We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Algonquin Power & Utilities Corp. (NYSE:AQN).
Algonquin Power & Utilities Corp. (NYSE:AQN) was in 13 hedge funds’ portfolios at the end of the fourth quarter of 2019. AQN investors should pay attention to a decrease in support from the world’s most elite money managers lately. There were 16 hedge funds in our database with AQN holdings at the end of the previous quarter. Our calculations also showed that AQN isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 S&P 500 ETFs by 41 percentage points since March 2017 (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.
Phill Gross of Adage Capital Management
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s review the fresh hedge fund action encompassing Algonquin Power & Utilities Corp. (NYSE:AQN).
How have hedgies been trading Algonquin Power & Utilities Corp. (NYSE:AQN)?
Heading into the first quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AQN over the last 18 quarters. With hedge funds’ capital changing hands, there exists a select group of notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
More specifically, GQG Partners was the largest shareholder of Algonquin Power & Utilities Corp. (NYSE:AQN), with a stake worth $99.6 million reported as of the end of September. Trailing GQG Partners was Renaissance Technologies, which amassed a stake valued at $45.9 million. Adage Capital Management, Two Sigma Advisors, and Ecofin Ltd 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 Ecofin Ltd allocated the biggest weight to Algonquin Power & Utilities Corp. (NYSE:AQN), around 7.43% of its 13F portfolio. Heronetta Management is also relatively very bullish on the stock, designating 2.8 percent of its 13F equity portfolio to AQN.
Judging by the fact that Algonquin Power & Utilities Corp. (NYSE:AQN) has faced a decline in interest from the aggregate hedge fund industry, it’s easy to see that there is a sect of money managers that decided to sell off their entire stakes last quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital cut the largest investment of all the hedgies watched by Insider Monkey, comprising close to $17.9 million in stock, and Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners was right behind this move, as the fund dropped about $4 million worth. These transactions are important to note, as total hedge fund interest dropped by 3 funds last quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Algonquin Power & Utilities Corp. (NYSE:AQN) but similarly valued. We will take a look at CyrusOne Inc (NASDAQ:CONE), AptarGroup, Inc. (NYSE:ATR), People’s United Financial, Inc. (NASDAQ:PBCT), and Signature Bank (NASDAQ:SBNY). This group of stocks’ market caps are similar to AQN’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CONE | 32 | 345805 | 8 |
| ATR | 25 | 137409 | 2 |
| PBCT | 22 | 125898 | -3 |
| SBNY | 21 | 461716 | -15 |
| Average | 25 | 267707 | -2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $268 million. That figure was $248 million in AQN’s case. CyrusOne Inc (NASDAQ:CONE) is the most popular stock in this table. On the other hand Signature Bank (NASDAQ:SBNY) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Algonquin Power & Utilities Corp. (NYSE:AQN) is even less popular than SBNY. Hedge funds clearly dropped the ball on AQN as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but still beat the market by 3.2 percentage points. A small number of hedge funds were also right about betting on AQN as the stock returned -17.8% during the same time period and outperformed the market by an even larger margin.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
