Is Arch Capital Group Ltd. (ACGL) A Good Stock To Buy?

The third quarter was a rough one for most investors, as fears of an interest rate hike in the U.S, a weakening economy in China, and a stagnant Europe, weighed heavily on the minds of investors. Both the S&P 500 and Russell 2000 sank as a result, with the Russell 2000, which is composed of smaller companies, being hit especially hard. This was primarily due to hedge funds, which are big supporters of small-cap stocks, pulling some of their capital out of the volatile markets during this time. Let’s look at how this market volatility affected the sentiment of hedge funds towards Arch Capital Group Ltd. (NASDAQ:ACGL), and what that likely means for the prospects of the company and its stock.

Arch Capital Group Ltd. (NASDAQ:ACGL) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 15 hedge funds’ portfolios at the end of the third quarter of 2015. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Cablevision Systems Corporation (NYSE:CVC), Dover Corp (NYSE:DOV), and First Republic Bank (NYSE:FRC) to gather more data points.

In the eyes of most stock holders, hedge funds are viewed as worthless, outdated financial vehicles of the past. While there are over 8000 funds with their doors open today, Our experts look at the top tier of this group, approximately 700 funds. It is estimated that this group of investors watch over bulk of all hedge funds’ total capital, and by watching their highest performing picks, Insider Monkey has unearthed several investment strategies that have historically exceeded the broader indices. Insider Monkey’s small-cap hedge fund strategy outpaced the S&P 500 index by 12 percentage points a year for a decade in their back tests.

With all of this in mind, let’s take a look at the key action surrounding Arch Capital Group Ltd. (NASDAQ:ACGL).

Hedge fund activity in Arch Capital Group Ltd. (NASDAQ:ACGL)

At Q3’s end, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. With the smart money’s sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, FPR Partners, managed by Bob Peck and Andy Raab, holds the largest position in Arch Capital Group Ltd. (NASDAQ:ACGL). FPR Partners has a $484.1 million position in the stock, comprising 12.1% of its 13F portfolio. Sitting at the No. 2 spot is Polar Capital, led by Brian Ashford-Russell and Tim Woolley, holding a $83.5 million position; the fund has 1.7% of its 13F portfolio invested in the stock. Remaining members of the smart money that hold long positions consist of Jim Simons’ Renaissance Technologies, Cliff Asness’ AQR Capital Management and D. E. Shaw’s D E Shaw.

Due to the fact that Arch Capital Group Ltd. (NASDAQ:ACGL) has witnessed falling interest from the aggregate hedge fund industry, it’s safe to say that there exists a select few money managers that elected to cut their entire stakes last quarter. Interestingly, Andrew Feldstein and Stephen Siderow’s Blue Mountain Capital cut the biggest stake of the 700 funds watched by Insider Monkey, worth about $1.2 million in stock. Joel Greenblatt’s fund, Gotham Asset Management, also said goodbye to its stock, about $0.3 million worth. These transactions are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now take a look at hedge fund activity in other stocks similar to Arch Capital Group Ltd. (NASDAQ:ACGL). These stocks are Cablevision Systems Corporation (NYSE:CVC), Dover Corp (NYSE:DOV), First Republic Bank (NYSE:FRC), and UDR, Inc. (NYSE:UDR). This group of stocks’ market valuations are similar to ACGL’s market valuation.

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 $652 million, compared to $716 million in ACGL’s case. Cablevision Systems Corporation (NYSE:CVC) is the most popular stock in this table. On the other hand UDR, Inc. (NYSE:UDR) is the least popular one with only 9 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. In this regard CVC might be a better candidate to consider a long position.