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 the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns 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 White Mountains Insurance Group Ltd (NYSE:WTM).
White Mountains Insurance Group Ltd (NYSE:WTM) investors should be aware of a decrease in activity from the world’s largest hedge funds of late. WTM was in 16 hedge funds’ portfolios at the end of September. There were 17 hedge funds in our database with WTM holdings at the end of the previous quarter. Our calculations also showed that WTM isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Ken Griffin of Citadel Investment Group
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to check out the recent hedge fund action regarding White Mountains Insurance Group Ltd (NYSE:WTM).
What does smart money think about White Mountains Insurance Group Ltd (NYSE:WTM)?
At the end of the third quarter, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the previous quarter. The graph below displays the number of hedge funds with bullish position in WTM over the last 17 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 White Mountains Insurance Group Ltd (NYSE:WTM) was held by Wallace Capital Management, which reported holding $83.4 million worth of stock at the end of September. It was followed by Elkhorn Partners with a $25.5 million position. Other investors bullish on the company included Renaissance Technologies, Impax Asset Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Elkhorn Partners allocated the biggest weight to White Mountains Insurance Group Ltd (NYSE:WTM), around 14.92% of its 13F portfolio. Wallace Capital Management is also relatively very bullish on the stock, setting aside 10.92 percent of its 13F equity portfolio to WTM.
Due to the fact that White Mountains Insurance Group Ltd (NYSE:WTM) has witnessed falling interest from hedge fund managers, logic holds that there is a sect of money managers who were dropping their full holdings last quarter. It’s worth mentioning that Israel Englander’s Millennium Management dumped the largest investment of the “upper crust” of funds monitored by Insider Monkey, comprising about $5.8 million in stock, and Chuck Royce’s Royce & Associates was right behind this move, as the fund cut about $2.1 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds last quarter.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as White Mountains Insurance Group Ltd (NYSE:WTM) but similarly valued. These stocks are Colfax Corporation (NYSE:CFX), Macquarie Infrastructure Corporation (NYSE:MIC), The Descartes Systems Group Inc (NASDAQ:DSGX), and Axon Enterprise, Inc. (NASDAQ:AAXN). All of these stocks’ market caps are closest to WTM’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CFX | 30 | 652861 | 3 |
| MIC | 26 | 231644 | -2 |
| DSGX | 14 | 126013 | 3 |
| AAXN | 14 | 209400 | -2 |
| Average | 21 | 304980 | 0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $305 million. That figure was $186 million in WTM’s case. Colfax Corporation (NYSE:CFX) is the most popular stock in this table. On the other hand The Descartes Systems Group Inc (NASDAQ:DSGX) is the least popular one with only 14 bullish hedge fund positions. White Mountains Insurance Group Ltd (NYSE:WTM) 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately WTM wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); WTM investors were disappointed as the stock returned 2.5% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
