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 returned approximately 12.1% in the first 5 months of this year through May 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month 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’ 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 Renewable Energy Group Inc (NASDAQ:REGI).
Renewable Energy Group Inc (NASDAQ:REGI) was in 19 hedge funds’ portfolios at the end of the first quarter of 2019. REGI has seen an increase in hedge fund sentiment recently. There were 18 hedge funds in our database with REGI positions at the end of the previous quarter. Our calculations also showed that regi isn’t among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? 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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let’s take a look at the new hedge fund action surrounding Renewable Energy Group Inc (NASDAQ:REGI).
How have hedgies been trading Renewable Energy Group Inc (NASDAQ:REGI)?
At Q1’s end, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from the fourth quarter of 2018. On the other hand, there were a total of 17 hedge funds with a bullish position in REGI a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Arrowstreet Capital was the largest shareholder of Renewable Energy Group Inc (NASDAQ:REGI), with a stake worth $17.9 million reported as of the end of March. Trailing Arrowstreet Capital was GLG Partners, which amassed a stake valued at $17.1 million. Arosa Capital Management, Balyasny Asset Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
As industrywide interest jumped, some big names were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the largest position in Renewable Energy Group Inc (NASDAQ:REGI). Arrowstreet Capital had $17.9 million invested in the company at the end of the quarter. David Costen Haley’s HBK Investments also initiated a $0.6 million position during the quarter. The following funds were also among the new REGI investors: Minhua Zhang’s Weld Capital Management, Paul Tudor Jones’s Tudor Investment Corp, and Chuck Royce’s Royce & Associates.
Let’s now take a look at hedge fund activity in other stocks similar to Renewable Energy Group Inc (NASDAQ:REGI). These stocks are nLIGHT, Inc. (NASDAQ:LASR), Cooper-Standard Holdings Inc (NYSE:CPS), John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS), and Monotype Imaging Holdings Inc. (NASDAQ:TYPE). This group of stocks’ market values are closest to REGI’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LASR | 5 | 57624 | 1 |
| CPS | 15 | 41038 | -2 |
| JBSS | 11 | 106528 | 1 |
| TYPE | 21 | 228038 | 4 |
| Average | 13 | 108307 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $108 million. That figure was $85 million in REGI’s case. Monotype Imaging Holdings Inc. (NASDAQ:TYPE) is the most popular stock in this table. On the other hand nLIGHT, Inc. (NASDAQ:LASR) is the least popular one with only 5 bullish hedge fund positions. Renewable Energy Group Inc (NASDAQ:REGI) 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 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately REGI wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on REGI were disappointed as the stock returned -29.1% during the same period 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
