Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren’t very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds’ top 20 stock picks easily bested the broader market, at 37.4% compared to 27.5%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn’t perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
Is HSBC Holdings plc (NYSE:HSBC) ready to rally soon? The smart money is getting less bullish. The number of bullish hedge fund positions retreated by 2 in recent months. Our calculations also showed that HSBC 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.
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 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.
Clint Carlson of Carlson Capital
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a peek at the key hedge fund action surrounding HSBC Holdings plc (NYSE:HSBC).
How have hedgies been trading HSBC Holdings plc (NYSE:HSBC)?
At Q3’s end, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in HSBC over the last 17 quarters. So, let’s check out 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 HSBC Holdings plc (NYSE:HSBC), which was worth $607.6 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $247.4 million worth of shares. LMR Partners, Segantii Capital, and Carlson Capital 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 Segantii Capital allocated the biggest weight to HSBC Holdings plc (NYSE:HSBC), around 10.95% of its 13F portfolio. LMR Partners is also relatively very bullish on the stock, earmarking 5.1 percent of its 13F equity portfolio to HSBC.
Due to the fact that HSBC Holdings plc (NYSE:HSBC) has faced falling interest from the smart money, we can see that there was a specific group of hedgies who sold off their full holdings heading into Q4. It’s worth mentioning that Boaz Weinstein’s Saba Capital dumped the largest position of the “upper crust” of funds watched by Insider Monkey, worth close to $2.6 million in stock, and David E. Shaw’s D E Shaw was right behind this move, as the fund cut about $0.6 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 2 funds heading into Q4.
Let’s also examine hedge fund activity in other stocks similar to HSBC Holdings plc (NYSE:HSBC). We will take a look at Abbott Laboratories (NYSE:ABT), NIKE, Inc. (NYSE:NKE), Medtronic plc (NYSE:MDT), and SAP SE (NYSE:SAP). This group of stocks’ market values are similar to HSBC’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ABT | 58 | 2062528 | 11 |
| NKE | 63 | 2304473 | 12 |
| MDT | 50 | 2120499 | 1 |
| SAP | 18 | 1578895 | 1 |
| Average | 47.25 | 2016599 | 6.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 47.25 hedge funds with bullish positions and the average amount invested in these stocks was $2017 million. That figure was $1124 million in HSBC’s case. NIKE, Inc. (NYSE:NKE) is the most popular stock in this table. On the other hand SAP SE (NYSE:SAP) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks HSBC Holdings plc (NYSE:HSBC) is even less popular than SAP. Hedge funds dodged a bullet by taking a bearish stance towards HSBC. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately HSBC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); HSBC investors were disappointed as the stock returned -1.3% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
