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 Foamix Pharmaceuticals Ltd (NASDAQ:FOMX).
Foamix Pharmaceuticals Ltd (NASDAQ:FOMX) was in 12 hedge funds’ portfolios at the end of the third quarter of 2019. FOMX investors should pay attention to a decrease in hedge fund interest in recent months. There were 13 hedge funds in our database with FOMX positions at the end of the previous quarter. Our calculations also showed that FOMX 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.
Michael Castor of Sio Capital
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 latest hedge fund action surrounding Foamix Pharmaceuticals Ltd (NASDAQ:FOMX).
What does smart money think about Foamix Pharmaceuticals Ltd (NASDAQ:FOMX)?
At Q3’s end, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from one quarter earlier. On the other hand, there were a total of 19 hedge funds with a bullish position in FOMX a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
Among these funds, Perceptive Advisors held the most valuable stake in Foamix Pharmaceuticals Ltd (NASDAQ:FOMX), which was worth $34.1 million at the end of the third quarter. On the second spot was OrbiMed Advisors which amassed $14.6 million worth of shares. Sio Capital, Rima Senvest Management, and Baker Bros. Advisors 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 Healthcare Value Capital allocated the biggest weight to Foamix Pharmaceuticals Ltd (NASDAQ:FOMX), around 1.37% of its 13F portfolio. Perceptive Advisors is also relatively very bullish on the stock, earmarking 0.92 percent of its 13F equity portfolio to FOMX.
Seeing as Foamix Pharmaceuticals Ltd (NASDAQ:FOMX) has witnessed bearish sentiment from the aggregate hedge fund industry, we can see that there is a sect of funds who sold off their full holdings by the end of the third quarter. At the top of the heap, Jeffrey Jay and David Kroin’s Great Point Partners dumped the largest investment of the 750 funds watched by Insider Monkey, valued at an estimated $5 million in stock, and Kamran Moghtaderi’s Eversept Partners was right behind this move, as the fund said goodbye to about $0.6 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds by the end of the third quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Foamix Pharmaceuticals Ltd (NASDAQ:FOMX) but similarly valued. We will take a look at Evans Bancorp Inc. (NYSE:EVBN), CorMedix Inc. (NYSE:CRMD), Affimed NV (NASDAQ:AFMD), and Exagen Inc. (NASDAQ:XGN). This group of stocks’ market caps are closest to FOMX’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EVBN | 3 | 5829 | 1 |
| CRMD | 6 | 7358 | 3 |
| AFMD | 11 | 19629 | 1 |
| XGN | 6 | 13870 | 6 |
| Average | 6.5 | 11672 | 2.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.5 hedge funds with bullish positions and the average amount invested in these stocks was $12 million. That figure was $59 million in FOMX’s case. Affimed NV (NASDAQ:AFMD) is the most popular stock in this table. On the other hand Evans Bancorp Inc. (NYSE:EVBN) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Foamix Pharmaceuticals Ltd (NASDAQ:FOMX) is more popular among hedge funds. 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 FOMX wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on FOMX were disappointed as the stock returned 4.6% 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.
