Is Fifth Street Finance Corp. (FSC) Going to Burn These Hedge Funds?

Fifth Street Finance Corp. (NASDAQ:FSC) was in 7 hedge funds’ portfolio at the end of the fourth quarter of 2012. FSC investors should pay attention to a decrease in activity from the world’s largest hedge funds lately. There were 7 hedge funds in our database with FSC holdings at the end of the previous quarter.

To most shareholders, hedge funds are viewed as underperforming, old financial tools of years past. While there are over 8000 funds with their doors open today, we choose to focus on the upper echelon of this group, about 450 funds. It is widely believed that this group has its hands on the lion’s share of the smart money’s total capital, and by keeping an eye on their top investments, we have figured out a few investment strategies that have historically outpaced the S&P 500 index. Our small-cap hedge fund strategy outperformed the S&P 500 index by 18 percentage points per year for a decade in our back tests, and since we’ve began to sharing our picks with our subscribers at the end of August 2012, we have outpaced the S&P 500 index by 24 percentage points in 7 months (see all of our picks from August).

Just as key, positive insider trading sentiment is a second way to break down the world of equities. There are many incentives for a bullish insider to downsize shares of his or her company, but only one, very simple reason why they would behave bullishly. Several empirical studies have demonstrated the valuable potential of this tactic if you know what to do (learn more here).

Now, we’re going to take a gander at the latest action surrounding Fifth Street Finance Corp. (NASDAQ:FSC).

How have hedgies been trading Fifth Street Finance Corp. (NASDAQ:FSC)?

Heading into 2013, a total of 7 of the hedge funds we track were long in this stock, a change of 0% from the previous quarter. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their stakes significantly.

When looking at the hedgies we track, Greenlight Capital, managed by David Einhorn, holds the most valuable position in Fifth Street Finance Corp. (NASDAQ:FSC). Greenlight Capital has a $20.8 million position in the stock, comprising 0.3% of its 13F portfolio. On Greenlight Capital’s heels is Ken Griffin of Citadel Investment Group, with a $9 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Other peers with similar optimism include Israel Englander’s Millennium Management, Whitney Tilson’s T2 Partners and John Overdeck and David Siegel’s Two Sigma Advisors.

Due to the fact that Fifth Street Finance Corp. (NASDAQ:FSC) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of fund managers that decided to sell off their positions entirely at the end of the year. Intriguingly, Cliff Asness’s AQR Capital Management dropped the biggest investment of all the hedgies we watch, valued at an estimated $1.5 million in stock. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

How are insiders trading Fifth Street Finance Corp. (NASDAQ:FSC)?

Insider trading activity, especially when it’s bullish, is particularly usable when the company in question has seen transactions within the past half-year. Over the latest 180-day time frame, Fifth Street Finance Corp. (NASDAQ:FSC) has seen 4 unique insiders buying, and zero insider sales (see the details of insider trades here).

Let’s also review hedge fund and insider activity in other stocks similar to Fifth Street Finance Corp. (NASDAQ:FSC). These stocks are Federal Agricultural Mortgage Corp. (NYSE:AGM), World Acceptance Corp. (NASDAQ:WRLD), Global Cash Access Holdings, Inc. (NYSE:GCA), DFC Global Corp (NASDAQ:DLLR), and NewStar Financial Inc (NASDAQ:NEWS). This group of stocks are in the credit services industry and their market caps are similar to FSC’s market cap.

With the returns shown by our tactics, everyday investors should always keep an eye on hedge fund and insider trading activity, and Fifth Street Finance Corp. (NASDAQ:FSC) shareholders fit into this picture quite nicely.

Click here to learn why you should track hedge funds