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 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% 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’ 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 Cleveland-Cliffs Inc (NYSE:CLF).
Is Cleveland-Cliffs Inc (NYSE:CLF) ready to rally soon? The smart money is getting more optimistic. The number of long hedge fund bets went up by 4 lately. Our calculations also showed that CLF isn’t among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? 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 market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
We’re going to analyze the recent hedge fund action encompassing Cleveland-Cliffs Inc (NYSE:CLF).
How are hedge funds trading Cleveland-Cliffs Inc (NYSE:CLF)?
At Q4’s end, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from the previous quarter. On the other hand, there were a total of 23 hedge funds with a bullish position in CLF 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.
Among these funds, Fisher Asset Management held the most valuable stake in Cleveland-Cliffs Inc (NYSE:CLF), which was worth $83.8 million at the end of the third quarter. On the second spot was Contrarian Capital which amassed $63.7 million worth of shares. Moreover, Citadel Investment Group, D E Shaw, and Bridgewater Associates were also bullish on Cleveland-Cliffs Inc (NYSE:CLF), allocating a large percentage of their portfolios to this stock.
As aggregate interest increased, some big names were breaking ground themselves. Renaissance Technologies, managed by Jim Simons, established the biggest position in Cleveland-Cliffs Inc (NYSE:CLF). Renaissance Technologies had $10.3 million invested in the company at the end of the quarter. Michael Burry’s Scion Asset Management also initiated a $8 million position during the quarter. The following funds were also among the new CLF investors: Mike Masters’s Masters Capital Management, James H. Litinsky’s JHL Capital Group, and Israel Englander’s Millennium Management.
Let’s check out hedge fund activity in other stocks similar to Cleveland-Cliffs Inc (NYSE:CLF). These stocks are California Water Service Group (NYSE:CWT), Corporate Office Properties Trust (NYSE:OFC), Mercury Systems Inc (NASDAQ:MRCY), and The Dolan Company (NYSE:DM). This group of stocks’ market valuations are similar to CLF’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CWT | 8 | 25843 | 5 |
| OFC | 23 | 137135 | 13 |
| MRCY | 6 | 19557 | -5 |
| DM | 5 | 13327 | 1 |
| Average | 10.5 | 48966 | 3.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.5 hedge funds with bullish positions and the average amount invested in these stocks was $49 million. That figure was $315 million in CLF’s case. Corporate Office Properties Trust (NYSE:OFC) is the most popular stock in this table. On the other hand The Dolan Company (NYSE:DM) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Cleveland-Cliffs Inc (NYSE:CLF) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on CLF, though not to the same extent, as the stock returned 21.4% and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
