Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ stock picks rather than directly investing in hedge funds. 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 Golden Entertainment Inc (NASDAQ:GDEN).
Golden Entertainment Inc (NASDAQ:GDEN) was in 12 hedge funds’ portfolios at the end of December. GDEN shareholders have witnessed a decrease in hedge fund sentiment lately. There were 17 hedge funds in our database with GDEN positions at the end of the previous quarter. Our calculations also showed that GDEN isn’t among the 30 most popular stocks among hedge funds.
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 32 percentage points since May 2014 through March 12, 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.
We’re going to take a gander at the new hedge fund action regarding Golden Entertainment Inc (NASDAQ:GDEN).
Hedge fund activity in Golden Entertainment Inc (NASDAQ:GDEN)
Heading into the first quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -29% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in GDEN over the last 14 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
Among these funds, Nantahala Capital Management held the most valuable stake in Golden Entertainment Inc (NASDAQ:GDEN), which was worth $40.5 million at the end of the fourth quarter. On the second spot was Bridger Management which amassed $20.6 million worth of shares. Moreover, Indaba Capital Management, Citadel Investment Group, and Millennium Management were also bullish on Golden Entertainment Inc (NASDAQ:GDEN), allocating a large percentage of their portfolios to this stock.
Judging by the fact that Golden Entertainment Inc (NASDAQ:GDEN) has experienced declining sentiment from hedge fund managers, logic holds that there was a specific group of fund managers that slashed their entire stakes heading into Q3. Intriguingly, Richard Driehaus’s Driehaus Capital cut the biggest investment of all the hedgies monitored by Insider Monkey, totaling an estimated $4.4 million in stock, and Matthew Drapkin and Steven R. Becker’s Becker Drapkin Management was right behind this move, as the fund dropped about $3 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 5 funds heading into Q3.
Let’s now take a look at hedge fund activity in other stocks similar to Golden Entertainment Inc (NASDAQ:GDEN). These stocks are Old Line Bancshares, Inc. (MD) (NASDAQ:OLBK), Venator Materials PLC (NYSE:VNTR), CalAmp Corp. (NASDAQ:CAMP), and UMH Properties, Inc (NYSE:UMH). This group of stocks’ market values are closest to GDEN’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| OLBK | 9 | 49764 | 2 |
| VNTR | 16 | 74101 | -3 |
| CAMP | 15 | 32666 | -2 |
| UMH | 8 | 13751 | -1 |
| Average | 12 | 42571 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $43 million. That figure was $117 million in GDEN’s case. Venator Materials PLC (NYSE:VNTR) is the most popular stock in this table. On the other hand UMH Properties, Inc (NYSE:UMH) is the least popular one with only 8 bullish hedge fund positions. Golden Entertainment Inc (NASDAQ:GDEN) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately GDEN wasn’t nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); GDEN investors were disappointed as the stock returned 0.7% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.
