Should You Avoid NetEase, Inc (ADR) (NTES)?

NetEase, Inc (ADR) (NASDAQ:NTES) has experienced a decrease in hedge fund sentiment recently.

According to most market participants, hedge funds are perceived as slow, outdated financial vehicles of years past. While there are over 8000 funds with their doors open at the moment, we choose to focus on the top tier of this club, about 450 funds. It is estimated that this group oversees the majority of the smart money’s total asset base, and by tracking their top picks, we have deciphered a few investment strategies that have historically beaten Mr. Market. Our small-cap hedge fund strategy outpaced the S&P 500 index by 18 percentage points a year for a decade in our back tests, and since we’ve began to sharing our picks with our subscribers at the end of August 2012, we have outpaced the S&P 500 index by 23.3 percentage points in 8 months (check out a sample of our picks).

Just as beneficial, bullish insider trading activity is a second way to break down the stock market universe. There are a variety of stimuli for an upper level exec to get rid of shares of his or her company, but only one, very obvious reason why they would buy. Many empirical studies have demonstrated the market-beating potential of this method if shareholders know what to do (learn more here).

Keeping this in mind, it’s important to take a peek at the latest action regarding NetEase, Inc (ADR) (NASDAQ:NTES).

What have hedge funds been doing with NetEase, Inc (ADR) (NASDAQ:NTES)?

At the end of the first quarter, a total of 10 of the hedge funds we track were long in this stock, a change of -38% from one quarter earlier. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their stakes considerably.

Of the funds we track, William B. Gray’s Orbis Investment Management had the biggest position in NetEase, Inc (ADR) (NASDAQ:NTES), worth close to $1.0724 billion, accounting for 9.1% of its total 13F portfolio. Sitting at the No. 2 spot is Jim Simons of Renaissance Technologies, with a $149 million position; 0.4% of its 13F portfolio is allocated to the stock. Some other hedgies that hold long positions include Panayotis Takis Sparaggis’s Alkeon Capital Management, Ken Griffin’s Citadel Investment Group and John Wu’s Sureview Capital.

Since NetEase, Inc (ADR) (NASDAQ:NTES) has witnessed a declination in interest from the smart money, we can see that there was a specific group of hedge funds that slashed their positions entirely in Q1. At the top of the heap, Stephen Mandel’s Lone Pine Capital dropped the biggest position of the 450+ funds we track, valued at about $32 million in stock., and Christopher Lord of Criterion Capital was right behind this move, as the fund said goodbye to about $3.4 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 6 funds in Q1.

How are insiders trading NetEase, Inc (ADR) (NASDAQ:NTES)?

Insider buying is at its handiest when the company in focus has seen transactions within the past 180 days. Over the latest half-year time frame, NetEase, Inc (ADR) (NASDAQ:NTES) has seen zero unique insiders buying, and zero insider sales (see the details of insider trades here).

Let’s also take a look at hedge fund and insider activity in other stocks similar to NetEase, Inc (ADR) (NASDAQ:NTES). These stocks are The Ultimate Software Group, Inc. (NASDAQ:ULTI), SINA Corp (NASDAQ:SINA), Equinix Inc (NASDAQ:EQIX), and CGI Group Inc. (USA) (NYSE:GIB). All of these stocks are in the internet software & services industry and their market caps match NTES’s market cap.