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 ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 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 Fennec Pharmaceuticals Inc. (NASDAQ:FENC).
Hedge fund interest in Fennec Pharmaceuticals Inc. (NASDAQ:FENC) shares was flat at the end of last quarter. This is usually a negative indicator. 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 Exfo Inc (NASDAQ:EXFO), Checkpoint Therapeutics, Inc. (NASDAQ:CKPT), and Sotherly Hotels Inc (NASDAQ:SOHO) to gather more data points. Our calculations also showed that FENC 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Israel Englander of Millennium Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind we’re going to go over the latest hedge fund action surrounding Fennec Pharmaceuticals Inc. (NASDAQ:FENC).
What does smart money think about Fennec Pharmaceuticals Inc. (NASDAQ:FENC)?
Heading into the fourth quarter of 2019, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 5 hedge funds with a bullish position in FENC a year ago. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
Among these funds, Southpoint Capital Advisors held the most valuable stake in Fennec Pharmaceuticals Inc. (NASDAQ:FENC), which was worth $19.2 million at the end of the third quarter. On the second spot was venBio Select Advisor which amassed $5.3 million worth of shares. 683 Capital Partners, Solas Capital Management, and Paloma Partners 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 Solas Capital Management allocated the biggest weight to Fennec Pharmaceuticals Inc. (NASDAQ:FENC), around 4.69% of its 13F portfolio. Southpoint Capital Advisors is also relatively very bullish on the stock, setting aside 0.73 percent of its 13F equity portfolio to FENC.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Fennec Pharmaceuticals Inc. (NASDAQ:FENC) but similarly valued. We will take a look at Exfo Inc (NASDAQ:EXFO), Checkpoint Therapeutics, Inc. (NASDAQ:CKPT), Sotherly Hotels Inc (NASDAQ:SOHO), and Millendo Therapeutics, Inc. (NASDAQ:MLND). All of these stocks’ market caps match FENC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EXFO | 1 | 4436 | 0 |
| CKPT | 2 | 596 | -2 |
| SOHO | 2 | 4722 | 1 |
| MLND | 7 | 23132 | 0 |
| Average | 3 | 8222 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 3 hedge funds with bullish positions and the average amount invested in these stocks was $8 million. That figure was $34 million in FENC’s case. Millendo Therapeutics, Inc. (NASDAQ:MLND) is the most popular stock in this table. On the other hand Exfo Inc (NASDAQ:EXFO) is the least popular one with only 1 bullish hedge fund positions. Fennec Pharmaceuticals Inc. (NASDAQ:FENC) is not the most popular stock in this group but hedge fund interest is still above 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. Hedge funds were also right about betting on FENC as the stock returned 30.2% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
