Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. 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 Steven Madden, Ltd. (NASDAQ:SHOO).
Is Steven Madden, Ltd. (NASDAQ:SHOO) a good investment today? Hedge funds are in a bullish mood. The number of long hedge fund bets went up by 3 in recent months. Our calculations also showed that SHOO 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’ 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 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 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.
Cliff Asness of AQR Capital Management
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 look at the latest hedge fund action regarding Steven Madden, Ltd. (NASDAQ:SHOO).
How have hedgies been trading Steven Madden, Ltd. (NASDAQ:SHOO)?
At Q3’s end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 21% from the second quarter of 2019. By comparison, 15 hedge funds held shares or bullish call options in SHOO a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Arrowstreet Capital held the most valuable stake in Steven Madden, Ltd. (NASDAQ:SHOO), which was worth $17 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $5.9 million worth of shares. Coatue Management, GLG Partners, and Royce & Associates 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 Zebra Capital Management allocated the biggest weight to Steven Madden, Ltd. (NASDAQ:SHOO), around 1.19% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, designating 0.34 percent of its 13F equity portfolio to SHOO.
As aggregate interest increased, specific money managers were leading the bulls’ herd. Coatue Management, managed by Philippe Laffont, assembled the most outsized position in Steven Madden, Ltd. (NASDAQ:SHOO). Coatue Management had $5 million invested in the company at the end of the quarter. Matthew Hulsizer’s PEAK6 Capital Management also made a $0.9 million investment in the stock during the quarter. The other funds with brand new SHOO positions are Mike Vranos’s Ellington, Ken Griffin’s Citadel Investment Group, and Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Steven Madden, Ltd. (NASDAQ:SHOO) but similarly valued. We will take a look at New Fortress Energy LLC (NASDAQ:NFE), Yamana Gold Inc. (NYSE:AUY), Medpace Holdings, Inc. (NASDAQ:MEDP), and FS KKR Capital Corp. (NASDAQ:FSK). This group of stocks’ market caps are similar to SHOO’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NFE | 4 | 30975 | -1 |
| AUY | 20 | 223608 | 2 |
| MEDP | 20 | 177896 | 5 |
| FSK | 22 | 211845 | 6 |
| Average | 16.5 | 161081 | 3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $161 million. That figure was $45 million in SHOO’s case. FS KKR Capital Corp. (NASDAQ:FSK) is the most popular stock in this table. On the other hand New Fortress Energy LLC (NASDAQ:NFE) is the least popular one with only 4 bullish hedge fund positions. Steven Madden, Ltd. (NASDAQ:SHOO) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on SHOO as the stock returned 18.7% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
