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 Index returned approximately 20% in the first 9 months of this year (through September 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-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 Mercury General Corporation (NYSE:MCY).
Mercury General Corporation (NYSE:MCY) was in 16 hedge funds’ portfolios at the end of June. MCY investors should be aware of an increase in hedge fund sentiment recently. There were 15 hedge funds in our database with MCY positions at the end of the previous quarter. However, overall hedge fund sentiment towards the stock is still bearish in comparison to similarly valued stocks. Our calculations also showed that MCY isn’t among the 30 most popular stocks among hedge funds (view the video below).
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s view the new hedge fund action regarding Mercury General Corporation (NYSE:MCY).
What have hedge funds been doing with Mercury General Corporation (NYSE:MCY)?
Heading into the third quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 7% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards MCY over the last 16 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
The largest stake in Mercury General Corporation (NYSE:MCY) was held by Renaissance Technologies, which reported holding $107.5 million worth of stock at the end of March. It was followed by Citadel Investment Group with a $18.5 million position. Other investors bullish on the company included GLG Partners, Prospector Partners, and Millennium Management.
As one would reasonably expect, some big names were leading the bulls’ herd. AQR Capital Management, managed by Cliff Asness, established the most valuable position in Mercury General Corporation (NYSE:MCY). AQR Capital Management had $6.7 million invested in the company at the end of the quarter. Michael Gelband’s ExodusPoint Capital also initiated a $0.5 million position during the quarter. The other funds with brand new MCY positions are David Harding’s Winton Capital Management, Mike Vranos’s Ellington, and Steve Cohen’s Point72 Asset Management.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Mercury General Corporation (NYSE:MCY) but similarly valued. These stocks are Glacier Bancorp, Inc. (NASDAQ:GBCI), Grocery Outlet Holding Corp. (NASDAQ:GO), Macquarie Infrastructure Corporation (NYSE:MIC), and Methanex Corporation (NASDAQ:MEOH). All of these stocks’ market caps are closest to MCY’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GBCI | 17 | 63296 | 5 |
| GO | 21 | 152804 | 21 |
| MIC | 28 | 203080 | 4 |
| MEOH | 17 | 118229 | -5 |
| Average | 20.75 | 134352 | 6.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $134 million. That figure was $191 million in MCY’s case. Macquarie Infrastructure Corporation (NYSE:MIC) is the most popular stock in this table. On the other hand Glacier Bancorp, Inc. (NASDAQ:GBCI) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Mercury General Corporation (NYSE:MCY) is even less popular than GBCI. Hedge funds dodged a bullet by taking a bearish stance towards MCY. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately MCY wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); MCY investors were disappointed as the stock returned -9.6% during the third 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.
