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 a complex analysis 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.
E*TRADE Financial Corporation (NASDAQ:ETFC) was in 41 hedge funds’ portfolios at the end of December. ETFC has experienced an increase in support from the world’s most elite money managers recently. There were 36 hedge funds in our database with ETFC holdings at the end of the previous quarter. Our calculations also showed that ETFC isn’t 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 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 look at the key hedge fund action regarding E*TRADE Financial Corporation (NASDAQ:ETFC).
Hedge fund activity in E*TRADE Financial Corporation (NASDAQ:ETFC)
Heading into the first quarter of 2019, a total of 41 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 14% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards ETFC over the last 14 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).
The largest stake in E*TRADE Financial Corporation (NASDAQ:ETFC) was held by Citadel Investment Group, which reported holding $219.2 million worth of stock at the end of September. It was followed by Millennium Management with a $204.9 million position. Other investors bullish on the company included D E Shaw, Southpoint Capital Advisors, and Arrowstreet Capital.
With a general bullishness amongst the heavyweights, specific money managers have been driving this bullishness. Balyasny Asset Management, managed by Dmitry Balyasny, created the largest position in E*TRADE Financial Corporation (NASDAQ:ETFC). Balyasny Asset Management had $40.2 million invested in the company at the end of the quarter. James Parsons’s Junto Capital Management also initiated a $36.3 million position during the quarter. The other funds with new positions in the stock are Martin Hughes’s Toscafund Asset Management, John Overdeck and David Siegel’s Two Sigma Advisors, and Bain Capital’s Brookside Capital.
Let’s check out hedge fund activity in other stocks similar to E*TRADE Financial Corporation (NASDAQ:ETFC). These stocks are Comerica Incorporated (NYSE:CMA), Vistra Energy Corp. (NYSE:VST), Seagate Technology plc (NASDAQ:STX), and Burlington Stores Inc (NYSE:BURL). This group of stocks’ market values resemble ETFC’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CMA | 36 | 743200 | -1 |
| VST | 44 | 3132642 | 6 |
| STX | 26 | 1673603 | -1 |
| BURL | 30 | 854880 | -5 |
| Average | 34 | 1601081 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $1601 million. That figure was $1262 million in ETFC’s case. Vistra Energy Corp. (NYSE:VST) is the most popular stock in this table. On the other hand Seagate Technology plc (NASDAQ:STX) is the least popular one with only 26 bullish hedge fund positions. E*TRADE Financial Corporation (NASDAQ:ETFC) 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 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately ETFC wasn’t in this group. Hedge funds that bet on ETFC were disappointed as the stock returned 12% 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 13 of these outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.
