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 complex research processes 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. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves.
Is Pzena Investment Management Inc (NYSE:PZN) the right investment to pursue these days? Prominent investors are in a pessimistic mood. The number of bullish hedge fund bets fell by 1 lately. Our calculations also showed that PZN isn’t among the 30 most popular stocks among hedge funds (see the video below).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 40 percentage points since May 2014 through May 30, 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s go over the key hedge fund action encompassing Pzena Investment Management Inc (NYSE:PZN).
What does smart money think about Pzena Investment Management Inc (NYSE:PZN)?
Heading into the third quarter of 2019, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PZN over the last 16 quarters. 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, Renaissance Technologies held the most valuable stake in Pzena Investment Management Inc (NYSE:PZN), which was worth $8.7 million at the end of the second quarter. On the second spot was Royce & Associates which amassed $8.5 million worth of shares. Moreover, GAMCO Investors, Marshall Wace LLP, and Arrowstreet Capital were also bullish on Pzena Investment Management Inc (NYSE:PZN), allocating a large percentage of their portfolios to this stock.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Citadel Investment Group. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified PZN as a viable investment and initiated a position in the stock.
Let’s now take a look at hedge fund activity in other stocks similar to Pzena Investment Management Inc (NYSE:PZN). We will take a look at BlackRock MuniVest Fund, Inc. (NYSE:MVF), Renewable Energy Group Inc (NASDAQ:REGI), Century Aluminum Company (NASDAQ:CENX), and Translate Bio, Inc. (NASDAQ:TBIO). This group of stocks’ market caps resemble PZN’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MVF | 1 | 458 | 0 |
| REGI | 17 | 54715 | -2 |
| CENX | 14 | 34743 | 2 |
| TBIO | 10 | 156077 | 3 |
| Average | 10.5 | 61498 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.5 hedge funds with bullish positions and the average amount invested in these stocks was $61 million. That figure was $19 million in PZN’s case. Renewable Energy Group Inc (NASDAQ:REGI) is the most popular stock in this table. On the other hand BlackRock MuniVest Fund, Inc. (NYSE:MVF) is the least popular one with only 1 bullish hedge fund positions. Pzena Investment Management Inc (NYSE:PZN) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on PZN, though not to the same extent, as the stock returned 4.2% during the third quarter and outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.
