Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren’t very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds’ top 20 stock picks easily bested the broader market, at 37.4% compared to 27.5%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn’t perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
Arch Capital Group Ltd. (NASDAQ:ACGL) was in 21 hedge funds’ portfolios at the end of September. ACGL has seen a decrease in hedge fund sentiment recently. There were 23 hedge funds in our database with ACGL positions at the end of the previous quarter. Our calculations also showed that ACGL 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.
David E. Shaw of D.E. Shaw
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 take a peek at the latest hedge fund action regarding Arch Capital Group Ltd. (NASDAQ:ACGL).
Hedge fund activity in Arch Capital Group Ltd. (NASDAQ:ACGL)
At the end of the third quarter, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ACGL over the last 17 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
More specifically, FPR Partners was the largest shareholder of Arch Capital Group Ltd. (NASDAQ:ACGL), with a stake worth $602.7 million reported as of the end of September. Trailing FPR Partners was Polar Capital, which amassed a stake valued at $290.8 million. Renaissance Technologies, AQR Capital Management, and D E Shaw 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 FPR Partners allocated the biggest weight to Arch Capital Group Ltd. (NASDAQ:ACGL), around 13.77% of its 13F portfolio. Polar Capital is also relatively very bullish on the stock, earmarking 2.62 percent of its 13F equity portfolio to ACGL.
Because Arch Capital Group Ltd. (NASDAQ:ACGL) has witnessed declining sentiment from hedge fund managers, we can see that there lies a certain “tier” of fund managers that elected to cut their full holdings heading into Q4. Intriguingly, Ken Griffin’s Citadel Investment Group sold off the biggest position of the 750 funds followed by Insider Monkey, comprising close to $19.8 million in stock, and Daniel Lascano’s Lomas Capital Management was right behind this move, as the fund sold off about $8.2 million worth. These moves are interesting, as total hedge fund interest dropped by 2 funds heading into Q4.
Let’s go over hedge fund activity in other stocks similar to Arch Capital Group Ltd. (NASDAQ:ACGL). These stocks are Equifax Inc. (NYSE:EFX), DISH Network Corporation (NASDAQ:DISH), HEICO Corporation (NYSE:HEI), and ZTO Express (Cayman) Inc. (NYSE:ZTO). This group of stocks’ market values match ACGL’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EFX | 26 | 1728610 | -8 |
| DISH | 36 | 1531248 | 4 |
| HEI | 42 | 1148598 | 7 |
| ZTO | 19 | 505301 | 4 |
| Average | 30.75 | 1228439 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 30.75 hedge funds with bullish positions and the average amount invested in these stocks was $1228 million. That figure was $1307 million in ACGL’s case. HEICO Corporation (NYSE:HEI) is the most popular stock in this table. On the other hand ZTO Express (Cayman) Inc. (NYSE:ZTO) is the least popular one with only 19 bullish hedge fund positions. Arch Capital Group Ltd. (NASDAQ:ACGL) 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 ACGL wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ACGL investors were disappointed as the stock returned 0% 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.
