MarketAxess Holdings Inc. (MKTX): Hedge Funds Are Cashing Out

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards MarketAxess Holdings Inc. (NASDAQ:MKTX).

Is MarketAxess Holdings Inc. (NASDAQ:MKTX) a buy here? Hedge funds were taking a pessimistic view. The number of bullish hedge fund positions shrunk by 3 recently. MarketAxess Holdings Inc. (NASDAQ:MKTX) was in 31 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 34. Our calculations also showed that MKTX isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 185.4% since March 2017 and outperformed the S&P 500 ETFs by more than 79 percentage points (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Peter Rathjens of Arrowstreet Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Now we’re going to take a gander at the latest hedge fund action surrounding MarketAxess Holdings Inc. (NASDAQ:MKTX).

Do Hedge Funds Think MKTX Is A Good Stock To Buy Now?

At the end of the second quarter, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from the first quarter of 2020. By comparison, 33 hedge funds held shares or bullish call options in MKTX a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, GuardCap Asset Management was the largest shareholder of MarketAxess Holdings Inc. (NASDAQ:MKTX), with a stake worth $239.8 million reported as of the end of June. Trailing GuardCap Asset Management was Renaissance Technologies, which amassed a stake valued at $141 million. Millennium Management, Arrowstreet Capital, and Islet Management 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 Lakehouse Capital allocated the biggest weight to MarketAxess Holdings Inc. (NASDAQ:MKTX), around 6.6% of its 13F portfolio. GuardCap Asset Management is also relatively very bullish on the stock, setting aside 3.46 percent of its 13F equity portfolio to MKTX.

Seeing as MarketAxess Holdings Inc. (NASDAQ:MKTX) has witnessed declining sentiment from the smart money, it’s easy to see that there lies a certain “tier” of money managers who were dropping their entire stakes in the second quarter. It’s worth mentioning that Catherine D. Wood’s ARK Investment Management dropped the biggest position of the “upper crust” of funds monitored by Insider Monkey, comprising about $16.5 million in stock. Brian Ashford-Russell and Tim Woolley’s fund, Polar Capital, also dumped its stock, about $7.7 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds in the second quarter.

Let’s go over hedge fund activity in other stocks similar to MarketAxess Holdings Inc. (NASDAQ:MKTX). We will take a look at Bio-Techne Corporation (NASDAQ:TECH), Pembina Pipeline Corp (NYSE:PBA), Conagra Brands, Inc. (NYSE:CAG), Avery Dennison Corporation (NYSE:AVY), Tata Motors Limited (NYSE:TTM), Jacobs Engineering Group Inc. (NYSE:J), and The AES Corporation (NYSE:AES). This group of stocks’ market caps resemble MKTX’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.6 hedge funds with bullish positions and the average amount invested in these stocks was $618 million. That figure was $605 million in MKTX’s case. The AES Corporation (NYSE:AES) is the most popular stock in this table. On the other hand Tata Motors Limited (NYSE:TTM) is the least popular one with only 8 bullish hedge fund positions. MarketAxess Holdings Inc. (NASDAQ:MKTX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MKTX is 66.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24.9% in 2021 through October 15th and beat the market again by 4.5 percentage points. Unfortunately MKTX wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on MKTX were disappointed as the stock returned -12.4% since the end of June (through 10/15) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.