Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Enerplus Corp (NYSE:ERF).
Enerplus Corp (NYSE:ERF) was in 15 hedge funds’ portfolios at the end of the third quarter of 2019. ERF investors should pay attention to an increase in hedge fund sentiment in recent months. There were 12 hedge funds in our database with ERF holdings at the end of the previous quarter. Our calculations also showed that ERF isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Noam Gottesman of GLG Partners
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a peek at the fresh hedge fund action encompassing Enerplus Corp (NYSE:ERF).
How have hedgies been trading Enerplus Corp (NYSE:ERF)?
Heading into the fourth quarter of 2019, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of 25% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ERF over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Encompass Capital Advisors, managed by Todd J. Kantor, holds the largest position in Enerplus Corp (NYSE:ERF). Encompass Capital Advisors has a $74.2 million position in the stock, comprising 5.1% of its 13F portfolio. Coming in second is Cardinal Capital, led by Amy Minella, holding a $27.5 million position; 0.9% of its 13F portfolio is allocated to the stock. Other members of the smart money with similar optimism comprise Noam Gottesman’s GLG Partners, John Overdeck and David Siegel’s Two Sigma Advisors and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Encompass Capital Advisors allocated the biggest weight to Enerplus Corp (NYSE:ERF), around 5.09% of its 13F portfolio. SIR Capital Management is also relatively very bullish on the stock, setting aside 1.74 percent of its 13F equity portfolio to ERF.
As aggregate interest increased, some big names were leading the bulls’ herd. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the biggest position in Enerplus Corp (NYSE:ERF). Balyasny Asset Management had $2.6 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace also made a $2.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Donald Sussman’s Paloma Partners, Joel Greenblatt’s Gotham Asset Management, and Matthew Hulsizer’s PEAK6 Capital Management.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Enerplus Corp (NYSE:ERF) but similarly valued. These stocks are SPS Commerce, Inc. (NASDAQ:SPSC), Progress Software Corporation (NASDAQ:PRGS), Patterson Companies, Inc. (NASDAQ:PDCO), and Axos Financial, Inc. (NYSE:AX). This group of stocks’ market caps match ERF’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SPSC | 17 | 142840 | -1 |
| PRGS | 21 | 206788 | -3 |
| PDCO | 22 | 159641 | -1 |
| AX | 13 | 54561 | -1 |
| Average | 18.25 | 140958 | -1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $141 million. That figure was $156 million in ERF’s case. Patterson Companies, Inc. (NASDAQ:PDCO) is the most popular stock in this table. On the other hand Axos Financial, Inc. (NYSE:AX) is the least popular one with only 13 bullish hedge fund positions. Enerplus Corp (NYSE:ERF) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ERF wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ERF investors were disappointed as the stock returned -16.6% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
