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.
Alibaba Group Holding Limited (NYSE:BABA) has seen an increase in enthusiasm from smart money of late. BABA was in 127 hedge funds’ portfolios at the end of the second quarter of 2019. There were 117 hedge funds in our database with BABA holdings at the end of the previous quarter. Our calculations also showed that BABA now ranks 5th 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.
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 check out the fresh hedge fund action regarding Alibaba Group Holding Limited (NYSE:BABA).
Hedge fund activity in Alibaba Group Holding Limited (NYSE:BABA)
Heading into the third quarter of 2019, a total of 127 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from the first quarter of 2019. On the other hand, there were a total of 117 hedge funds with a bullish position in BABA a year ago. With hedge funds’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Ken Fisher’s Fisher Asset Management has the largest position in Alibaba Group Holding Limited (NYSE:BABA), worth close to $1.958 billion, accounting for 2.2% of its total 13F portfolio. The second largest stake is held by Ken Griffin of Citadel Investment Group, with a $1.2997 billion call position; the fund has 0.6% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish encompass D. E. Shaw’s D E Shaw, Stephen Mandel’s Lone Pine Capital and John Armitage’s Egerton Capital Limited.
Consequently, key hedge funds have jumped into Alibaba Group Holding Limited (NYSE:BABA) headfirst. D1 Capital Partners, managed by Daniel Sundheim, initiated the largest position in Alibaba Group Holding Limited (NYSE:BABA). D1 Capital Partners had $717.6 million invested in the company at the end of the quarter. Ricky Sandler’s Eminence Capital also made a $259.9 million investment in the stock during the quarter. The other funds with new positions in the stock are OZ Management, Leon Shaulov’s Maplelane Capital, and Gabriel Plotkin’s Melvin Capital Management.
Let’s also examine hedge fund activity in other stocks similar to Alibaba Group Holding Limited (NYSE:BABA). We will take a look at Visa Inc (NYSE:V), Johnson & Johnson (NYSE:JNJ), JPMorgan Chase & Co. (NYSE:JPM), and Exxon Mobil Corporation (NYSE:XOM). This group of stocks’ market caps resemble BABA’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| V | 117 | 15186566 | -7 |
| JNJ | 63 | 6757234 | -6 |
| JPM | 90 | 11264732 | -10 |
| XOM | 50 | 1332153 | 1 |
| Average | 80 | 8635171 | -5.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 80 hedge funds with bullish positions and the average amount invested in these stocks was $8.635 billion. That figure was $16.6 billion in BABA’s case. Visa Inc (NYSE:V) is the most popular stock in this table. On the other hand Exxon Mobil Corporation (NYSE:XOM) is the least popular one with only 50 bullish hedge fund positions. Compared to these stocks Alibaba Group Holding Limited (NYSE:BABA) is more popular among hedge funds. 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 BABA wasn’t nearly as successful as these 20 stocks and hedge funds that were betting on BABA were disappointed as the stock returned -1.3% 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 in Q3.
Disclosure: None. This article was originally published at Insider Monkey.
