Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. 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 Belden Inc. (NYSE:BDC).
Is Belden Inc. (NYSE:BDC) the right investment to pursue these days? Prominent investors are getting less optimistic. The number of long hedge fund positions decreased by 1 lately. Our calculations also showed that BDC isn’t among the 30 most popular stocks among hedge funds (see the video below). BDC was in 15 hedge funds’ portfolios at the end of June. There were 16 hedge funds in our database with BDC positions at the end of the previous quarter.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s take a look at the latest hedge fund action surrounding Belden Inc. (NYSE:BDC).
How have hedgies been trading Belden Inc. (NYSE:BDC)?
At Q2’s end, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from one quarter earlier. On the other hand, there were a total of 11 hedge funds with a bullish position in BDC a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Arrowstreet Capital was the largest shareholder of Belden Inc. (NYSE:BDC), with a stake worth $17.6 million reported as of the end of March. Trailing Arrowstreet Capital was Renaissance Technologies, which amassed a stake valued at $15.6 million. AQR Capital Management, D E Shaw, and Gotham Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.
Due to the fact that Belden Inc. (NYSE:BDC) has faced bearish sentiment from the smart money, it’s safe to say that there lies a certain “tier” of hedgies who were dropping their positions entirely in the second quarter. At the top of the heap, Bradley Louis Radoff’s Fondren Management dropped the biggest investment of all the hedgies followed by Insider Monkey, comprising close to $0.4 million in stock, and Jeffrey Talpins’s Element Capital Management was right behind this move, as the fund said goodbye to about $0.2 million worth. These transactions are interesting, as total hedge fund interest was cut by 1 funds in the second quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Belden Inc. (NYSE:BDC) but similarly valued. We will take a look at NeoGenomics, Inc. (NASDAQ:NEO), Harsco Corporation (NYSE:HSC), Franklin Electric Co., Inc. (NASDAQ:FELE), and The RealReal, Inc. (NASDAQ:REAL). This group of stocks’ market valuations resemble BDC’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NEO | 17 | 92899 | 2 |
| HSC | 18 | 137306 | -1 |
| FELE | 14 | 224900 | -1 |
| REAL | 33 | 101696 | 33 |
| Average | 20.5 | 139200 | 8.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $139 million. That figure was $81 million in BDC’s case. The RealReal, Inc. (NASDAQ:REAL) is the most popular stock in this table. On the other hand Franklin Electric Co., Inc. (NASDAQ:FELE) is the least popular one with only 14 bullish hedge fund positions. Belden Inc. (NYSE:BDC) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately BDC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); BDC investors were disappointed as the stock returned -10.4% during the third 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.
