It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. 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 ALLETE Inc (NYSE:ALE).
ALLETE Inc (NYSE:ALE) investors should pay attention to a decrease in hedge fund interest in recent months. Our calculations also showed that ALE 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.
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’ 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Noam Gottesman of GLG Partners
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s analyze the key hedge fund action encompassing ALLETE Inc (NYSE:ALE).
How have hedgies been trading ALLETE Inc (NYSE:ALE)?
At Q3’s end, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -21% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in ALE over the last 17 quarters. With the smart money’s capital changing hands, there exists a select group of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in ALLETE Inc (NYSE:ALE), which was worth $83.3 million at the end of the third quarter. On the second spot was Polaris Capital Management which amassed $56.2 million worth of shares. AQR Capital Management, GLG Partners, and Millennium Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Shelter Harbor Advisors allocated the biggest weight to ALLETE Inc (NYSE:ALE), around 3.31% of its 13F portfolio. Polaris Capital Management is also relatively very bullish on the stock, dishing out 2.53 percent of its 13F equity portfolio to ALE.
Due to the fact that ALLETE Inc (NYSE:ALE) has witnessed declining sentiment from the aggregate hedge fund industry, we can see that there lies a certain “tier” of hedgies that elected to cut their positions entirely heading into Q4. Interestingly, David E. Shaw’s D E Shaw cut the largest stake of the “upper crust” of funds watched by Insider Monkey, valued at close to $1.6 million in stock. Benjamin A. Smith’s fund, Laurion Capital Management, also dumped its stock, about $1.2 million worth. These moves are interesting, as total hedge fund interest was cut by 5 funds heading into Q4.
Let’s go over hedge fund activity in other stocks similar to ALLETE Inc (NYSE:ALE). We will take a look at AutoNation, Inc. (NYSE:AN), Brighthouse Financial, Inc. (NASDAQ:BHF), Marriott Vacations Worldwide Corporation (NYSE:VAC), and CoreSite Realty Corp (NYSE:COR). All of these stocks’ market caps are similar to ALE’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| AN | 21 | 416097 | -1 |
| BHF | 26 | 528808 | 3 |
| VAC | 27 | 488721 | 0 |
| COR | 14 | 265606 | 0 |
| Average | 22 | 424808 | 0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $425 million. That figure was $278 million in ALE’s case. Marriott Vacations Worldwide Corporation (NYSE:VAC) is the most popular stock in this table. On the other hand CoreSite Realty Corp (NYSE:COR) is the least popular one with only 14 bullish hedge fund positions. ALLETE Inc (NYSE:ALE) 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 ALE wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ALE investors were disappointed as the stock returned -7.7% 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.
