Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 26% in 2019 (through November 22nd). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of nearly 35% during the same 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 is wise to check hedge fund activity before you invest your time or your savings on a stock like American Equity Investment Life Holding (NYSE:AEL).
American Equity Investment Life Holding (NYSE:AEL) has experienced an increase in activity from the world’s largest hedge funds recently. AEL was in 18 hedge funds’ portfolios at the end of September. There were 17 hedge funds in our database with AEL holdings at the end of the previous quarter. Our calculations also showed that AEL 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’ 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 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 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.
Richard S. Pzena of Pzena Investment Management
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. Let’s take a glance at the fresh hedge fund action surrounding American Equity Investment Life Holding (NYSE:AEL).
What have hedge funds been doing with American Equity Investment Life Holding (NYSE:AEL)?
At the end of the third quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from one quarter earlier. By comparison, 13 hedge funds held shares or bullish call options in AEL a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in American Equity Investment Life Holding (NYSE:AEL) was held by Pzena Investment Management, which reported holding $34.2 million worth of stock at the end of September. It was followed by GLG Partners with a $19.1 million position. Other investors bullish on the company included Renaissance Technologies, D E Shaw, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Neo Ivy Capital allocated the biggest weight to American Equity Investment Life Holding (NYSE:AEL), around 0.61% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, dishing out 0.47 percent of its 13F equity portfolio to AEL.
As one would reasonably expect, some big names have jumped into American Equity Investment Life Holding (NYSE:AEL) headfirst. Marshall Wace, managed by Paul Marshall and Ian Wace, assembled the most valuable position in American Equity Investment Life Holding (NYSE:AEL). Marshall Wace had $1.7 million invested in the company at the end of the quarter. Renee Yao’s Neo Ivy Capital also initiated a $0.9 million position during the quarter. The only other fund with a new position in the stock is Donald Sussman’s Paloma Partners.
Let’s check out hedge fund activity in other stocks similar to American Equity Investment Life Holding (NYSE:AEL). We will take a look at Applied Industrial Technologies (NYSE:AIT), WMS Industries Inc. (NYSE:WMS), Mimecast Limited (NASDAQ:MIME), and Washington Real Estate Investment Trust (NYSE:WRE). This group of stocks’ market caps resemble AEL’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| AIT | 20 | 106164 | 2 |
| WMS | 24 | 335640 | 7 |
| MIME | 36 | 669132 | 10 |
| WRE | 5 | 115764 | -1 |
| Average | 21.25 | 306675 | 4.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $307 million. That figure was $88 million in AEL’s case. Mimecast Limited (NASDAQ:MIME) is the most popular stock in this table. On the other hand Washington Real Estate Investment Trust (NYSE:WRE) is the least popular one with only 5 bullish hedge fund positions. American Equity Investment Life Holding (NYSE:AEL) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on AEL as the stock returned 22.8% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
