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 Starwood Property Trust, Inc. (NYSE:STWD).
Starwood Property Trust, Inc. (NYSE:STWD) was in 17 hedge funds’ portfolios at the end of the fourth quarter of 2018. STWD investors should pay attention to a decrease in enthusiasm from smart money in recent months. There were 21 hedge funds in our database with STWD positions at the end of the previous quarter. Our calculations also showed that STWD isn’t among the 30 most popular stocks among hedge funds.
To most traders, hedge funds are viewed as worthless, outdated investment vehicles of years past. While there are over 8000 funds with their doors open today, We hone in on the bigwigs of this club, around 750 funds. These investment experts orchestrate the lion’s share of the hedge fund industry’s total asset base, and by following their finest equity investments, Insider Monkey has formulated a number of investment strategies that have historically outrun Mr. Market. Insider Monkey’s flagship hedge fund strategy beat the S&P 500 index by nearly 5 percentage points annually since its inception in May 2014 through early November 2018. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 27.5% since February 2017 (through March 12th) even though the market was up nearly 25% during the same period. We just shared a list of 6 short targets in our latest quarterly update and they are already down an average of 6% in less than a month.
We’re going to take a gander at the key hedge fund action encompassing Starwood Property Trust, Inc. (NYSE:STWD).
What does the smart money think about Starwood Property Trust, Inc. (NYSE:STWD)?
At the end of the fourth quarter, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards STWD over the last 14 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Starwood Property Trust, Inc. (NYSE:STWD) was held by Clough Capital Partners, which reported holding $32.2 million worth of stock at the end of September. It was followed by Cardinal Capital with a $31.8 million position. Other investors bullish on the company included Two Sigma Advisors, Cobalt Capital Management, and Waterfront Capital Partners.
Due to the fact that Starwood Property Trust, Inc. (NYSE:STWD) has faced falling interest from hedge fund managers, logic holds that there were a few fund managers that elected to cut their entire stakes in the third quarter. Intriguingly, Jim Simons’s Renaissance Technologies dumped the largest position of the “upper crust” of funds tracked by Insider Monkey, valued at close to $36.8 million in stock, and Howard Marks’s Oaktree Capital Management was right behind this move, as the fund sold off about $6.4 million worth. These moves are interesting, as total hedge fund interest fell by 4 funds in the third quarter.
Let’s also examine hedge fund activity in other stocks similar to Starwood Property Trust, Inc. (NYSE:STWD). These stocks are bluebird bio Inc (NASDAQ:BLUE), Fair Isaac Corporation (NYSE:FICO), Zayo Group Holdings Inc (NYSE:ZAYO), and RenaissanceRe Holdings Ltd. (NYSE:RNR). This group of stocks’ market values resemble STWD’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BLUE | 16 | 115978 | -18 |
| FICO | 24 | 313924 | 3 |
| ZAYO | 56 | 1247889 | 1 |
| RNR | 22 | 489483 | 2 |
| Average | 29.5 | 541819 | -3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $542 million. That figure was $131 million in STWD’s case. Zayo Group Holdings Inc (NYSE:ZAYO) is the most popular stock in this table. On the other hand bluebird bio Inc (NASDAQ:BLUE) is the least popular one with only 16 bullish hedge fund positions. Starwood Property Trust, Inc. (NYSE:STWD) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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. Hedge funds were also right about betting on STWD, though not to the same extent, as the stock returned 17.4% and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
