Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example in the first 5 months of this year through May 30th the Standard and Poor’s 500 Index returned approximately 12.1% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like People’s United Financial, Inc. (NASDAQ:PBCT).
Is People’s United Financial, Inc. (NASDAQ:PBCT) a buy right now? Money managers are reducing their bets on the stock. The number of long hedge fund bets decreased by 2 recently. Our calculations also showed that PBCT isn’t among the 30 most popular stocks among hedge funds. PBCT was in 20 hedge funds’ portfolios at the end of March. There were 22 hedge funds in our database with PBCT holdings at the end of the previous quarter.
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.
Cliff Asness of AQR Capital Management
Let’s take a look at the new hedge fund action encompassing People’s United Financial, Inc. (NASDAQ:PBCT).
Hedge fund activity in People’s United Financial, Inc. (NASDAQ:PBCT)
At Q1’s end, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from one quarter earlier. By comparison, 16 hedge funds held shares or bullish call options in PBCT a year ago. 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, Citadel Investment Group held the most valuable stake in People’s United Financial, Inc. (NASDAQ:PBCT), which was worth $68.9 million at the end of the first quarter. On the second spot was Renaissance Technologies which amassed $49.8 million worth of shares. Moreover, AQR Capital Management, Gillson Capital, and GLG Partners were also bullish on People’s United Financial, Inc. (NASDAQ:PBCT), allocating a large percentage of their portfolios to this stock.
Since People’s United Financial, Inc. (NASDAQ:PBCT) has witnessed a decline in interest from the aggregate hedge fund industry, logic holds that there was a specific group of hedge funds that elected to cut their full holdings last quarter. Interestingly, Israel Englander’s Millennium Management sold off the largest stake of all the hedgies watched by Insider Monkey, totaling about $15.5 million in stock. Matthew Tewksbury’s fund, Stevens Capital Management, also dumped its stock, about $5.9 million worth. These moves are important to note, as total hedge fund interest dropped by 2 funds last quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as People’s United Financial, Inc. (NASDAQ:PBCT) but similarly valued. We will take a look at Companhia Brasileira de Distribuição (NYSE:CBD), Dunkin Brands Group Inc (NASDAQ:DNKN), Enable Midstream Partners LP (NYSE:ENBL), and LG Display Co Ltd. (NYSE:LPL). This group of stocks’ market values match PBCT’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CBD | 12 | 93559 | -1 |
| DNKN | 22 | 186239 | 4 |
| ENBL | 5 | 32143 | 1 |
| LPL | 6 | 16279 | 1 |
| Average | 11.25 | 82055 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $82 million. That figure was $177 million in PBCT’s case. Dunkin Brands Group Inc (NASDAQ:DNKN) is the most popular stock in this table. On the other hand Enable Midstream Partners LP (NYSE:ENBL) is the least popular one with only 5 bullish hedge fund positions. People’s United Financial, Inc. (NASDAQ:PBCT) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately PBCT wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on PBCT were disappointed as the stock returned -4.4% during the same period 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
