It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. 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 MAG Silver Corporation (NYSE:MAG).
MAG Silver Corporation (NYSE:MAG) was in 12 hedge funds’ portfolios at the end of September. MAG has seen an increase in enthusiasm from smart money recently. There were 9 hedge funds in our database with MAG positions at the end of the previous quarter. Our calculations also showed that MAG 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.
Dmitry Balyasny of Balyasny Asset Managemnet
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 based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We’re going to take a gander at the key hedge fund action regarding MAG Silver Corporation (NYSE:MAG).
How have hedgies been trading MAG Silver Corporation (NYSE:MAG)?
At the end of the third quarter, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 33% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in MAG over the last 17 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in MAG Silver Corporation (NYSE:MAG) was held by Sprott Asset Management, which reported holding $17.2 million worth of stock at the end of September. It was followed by Royce & Associates with a $3.7 million position. Other investors bullish on the company included D E Shaw, GRT Capital Partners, and Ionic Capital Management. In terms of the portfolio weights assigned to each position Sprott Asset Management allocated the biggest weight to MAG Silver Corporation (NYSE:MAG), around 4.39% of its 13F portfolio. GRT Capital Partners is also relatively very bullish on the stock, earmarking 1.16 percent of its 13F equity portfolio to MAG.
As one would reasonably expect, some big names were breaking ground themselves. Ionic Capital Management, managed by Bart Baum, established the most outsized call position in MAG Silver Corporation (NYSE:MAG). Ionic Capital Management had $1.4 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also made a $0.2 million investment in the stock during the quarter. The following funds were also among the new MAG investors: Dmitry Balyasny’s Balyasny Asset Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Michael Platt and William Reeves’s BlueCrest Capital Mgmt..
Let’s check out hedge fund activity in other stocks similar to MAG Silver Corporation (NYSE:MAG). We will take a look at Hollysys Automation Technologies Ltd (NASDAQ:HOLI), NGM Biopharmaceuticals, Inc. (NASDAQ:NGM), ProPetro Holding Corp. (NYSE:PUMP), and Hyster-Yale Materials Handling Inc (NYSE:HY). This group of stocks’ market caps are similar to MAG’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HOLI | 13 | 61301 | 0 |
| NGM | 9 | 18872 | -1 |
| PUMP | 22 | 152253 | -2 |
| HY | 14 | 33412 | 2 |
| Average | 14.5 | 66460 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $66 million. That figure was $27 million in MAG’s case. ProPetro Holding Corp. (NYSE:PUMP) is the most popular stock in this table. On the other hand NGM Biopharmaceuticals, Inc. (NASDAQ:NGM) is the least popular one with only 9 bullish hedge fund positions. MAG Silver Corporation (NYSE:MAG) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MAG wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); MAG investors were disappointed as the stock returned 0.8% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
