Should You Avoid Rio Tinto plc (ADR) (RIO)?

Rio Tinto plc (ADR) (NYSE:RIO) investors should be aware of a decrease in activity from the world’s largest hedge funds in recent months.

To most investors, hedge funds are assumed to be worthless, outdated investment tools of yesteryear. While there are over 8000 funds in operation today, we choose to focus on the elite of this group, around 450 funds. Most estimates calculate that this group controls the majority of the smart money’s total asset base, and by keeping an eye on their highest performing investments, we have deciphered a number of investment strategies that have historically outpaced Mr. Market. Our small-cap hedge fund strategy outstripped the S&P 500 index by 18 percentage points annually for a decade in our back tests, and since we’ve started sharing our picks with our subscribers at the end of August 2012, we have beaten the S&P 500 index by 23.3 percentage points in 8 months (see all of our picks from August).

Equally as key, bullish insider trading sentiment is a second way to parse down the marketplace. Obviously, there are plenty of motivations for an insider to sell shares of his or her company, but just one, very simple reason why they would behave bullishly. Many empirical studies have demonstrated the impressive potential of this strategy if investors understand where to look (learn more here).

Keeping this in mind, let’s take a glance at the recent action encompassing Rio Tinto plc (ADR) (NYSE:RIO).

How have hedgies been trading Rio Tinto plc (ADR) (NYSE:RIO)?

Heading into Q2, a total of 11 of the hedge funds we track were long in this stock, a change of 0% from one quarter earlier. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

According to our comprehensive database, Ken Fisher’s Fisher Asset Management had the biggest position in Rio Tinto plc (ADR) (NYSE:RIO), worth close to $474.2 million, comprising 1.3% of its total 13F portfolio. Coming in second is Scout Capital Management, managed by James Crichton and Adam Weiss, which held a $37.7 million call position; 0.5% of its 13F portfolio is allocated to the stock. Some other peers that hold long positions include Jim Simons’s Renaissance Technologies, Russell Hawkins’s Hawkins Capital and Israel Englander’s Millennium Management.

Since Rio Tinto plc (ADR) (NYSE:RIO) has witnessed falling interest from hedge fund managers, it’s safe to say that there was a specific group of hedge funds that slashed their entire stakes in Q1. Intriguingly, Steven Cohen’s SAC Capital Advisors dropped the largest position of the “upper crust” of funds we key on, valued at an estimated $14.9 million in stock., and Arvind Sanger of GeoSphere Capital Management was right behind this move, as the fund said goodbye to about $5.9 million worth.

What do corporate executives and insiders think about Rio Tinto plc (ADR) (NYSE:RIO)?

Insider buying is at its handiest when the primary stock in question has seen transactions within the past 180 days. Over the last six-month time frame, Rio Tinto plc (ADR) (NYSE:RIO) has seen zero unique insiders purchasing, and zero insider sales (see the details of insider trades here).

Let’s also review hedge fund and insider activity in other stocks similar to Rio Tinto plc (ADR) (NYSE:RIO). These stocks are Cameco Corporation (USA) (NYSE:CCJ), Teck Resources Ltd (USA) (NYSE:TCK), BHP Billiton Limited (ADR) (NYSE:BHP), BHP Billiton plc (ADR) (NYSE:BBL), and Vale SA (ADR) (NYSE:VALE). This group of stocks are in the industrial metals & minerals industry and their market caps resemble RIO’s market cap.

With the returns demonstrated by our tactics, retail investors must always pay attention to hedge fund and insider trading activity, and Rio Tinto plc (ADR) (NYSE:RIO) shareholders fit into this picture quite nicely.

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