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 in the first 2.5 months of this year the Standard and Poor’s 500 Index returned approximately 13.1% (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only 5% due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns (5%) 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 Ciena Corporation (NYSE:CIEN).
Is Ciena Corporation (NYSE:CIEN) worth your attention right now? Hedge funds are turning bullish. The number of long hedge fund bets went up by 4 lately. Our calculations also showed that CIEN isn’t among the 30 most popular stocks among hedge funds. CIEN was in 29 hedge funds’ portfolios at the end of December. There were 25 hedge funds in our database with CIEN positions at the end of the previous quarter.
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 32 percentage points since May 2014 through March 12, 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.
We’re going to take a peek at the key hedge fund action regarding Ciena Corporation (NYSE:CIEN).
What does the smart money think about Ciena Corporation (NYSE:CIEN)?
Heading into the first quarter of 2019, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 16% from the previous quarter. By comparison, 19 hedge funds held shares or bullish call options in CIEN a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, AQR Capital Management, managed by Cliff Asness, holds the number one position in Ciena Corporation (NYSE:CIEN). AQR Capital Management has a $105.8 million position in the stock, comprising 0.1% of its 13F portfolio. The second largest stake is held by Cavalry Asset Management, led by John Hurley, holding a $36.9 million position; the fund has 8.6% of its 13F portfolio invested in the stock. Remaining members of the smart money with similar optimism comprise Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, D. E. Shaw’s D E Shaw and Steve Cohen’s Point72 Asset Management.
As one would reasonably expect, key money managers were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the biggest position in Ciena Corporation (NYSE:CIEN). Arrowstreet Capital had $32.1 million invested in the company at the end of the quarter. David Costen Haley’s HBK Investments also made a $5.4 million investment in the stock during the quarter. The other funds with brand new CIEN positions are Paul Marshall and Ian Wace’s Marshall Wace LLP, Matthew Hulsizer’s PEAK6 Capital Management, and Michael Kharitonov and Jon David McAuliffe’s Voleon Capital.
Let’s now review hedge fund activity in other stocks similar to Ciena Corporation (NYSE:CIEN). We will take a look at Sonoco Products Company (NYSE:SON), Dun & Bradstreet Corporation (NYSE:DNB), Gentex Corporation (NASDAQ:GNTX), and LPL Financial Holdings Inc (NASDAQ:LPLA). All of these stocks’ market caps are similar to CIEN’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SON | 17 | 108922 | -6 |
| DNB | 28 | 875958 | -6 |
| GNTX | 23 | 265240 | -4 |
| LPLA | 34 | 1007196 | -1 |
| Average | 25.5 | 564329 | -4.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.5 hedge funds with bullish positions and the average amount invested in these stocks was $564 million. That figure was $333 million in CIEN’s case. LPL Financial Holdings Inc (NASDAQ:LPLA) is the most popular stock in this table. On the other hand Sonoco Products Company (NYSE:SON) is the least popular one with only 17 bullish hedge fund positions. Ciena Corporation (NYSE:CIEN) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Unfortunately CIEN wasn’t in this group. Hedge funds that bet on CIEN were disappointed as the stock returned 9.8% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 12 of these outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.
