Were Hedge Funds Right About Crowding Into IAC/InterActiveCorp (IAC)?

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 IAC/InterActiveCorp (NASDAQ:IAC).

Is IAC/InterActiveCorp (NASDAQ:IAC) ready to rally soon? The smart money was in an optimistic mood. The number of long hedge fund bets moved up by 3 recently. IAC/InterActiveCorp (NASDAQ:IAC) was in 60 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 71. Our calculations also showed that IAC isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 S&P 500 ETFs by 58 percentage points since March 2017 (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.

Keith Meister of Corvex Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. With all of this in mind let’s take a look at the key hedge fund action regarding IAC/InterActiveCorp (NASDAQ:IAC).

How are hedge funds trading IAC/InterActiveCorp (NASDAQ:IAC)?

At the end of June, a total of 60 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 5% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards IAC over the last 20 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in IAC/InterActiveCorp (NASDAQ:IAC) was held by Aristeia Capital, which reported holding $705.4 million worth of stock at the end of September. It was followed by Ursa Fund Management with a $629.8 million position. Other investors bullish on the company included Farallon Capital, Luxor Capital Group, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Ursa Fund Management allocated the biggest weight to IAC/InterActiveCorp (NASDAQ:IAC), around 38.09% of its 13F portfolio. Aristeia Capital is also relatively very bullish on the stock, dishing out 36.05 percent of its 13F equity portfolio to IAC.

As aggregate interest increased, key money managers were breaking ground themselves. Corvex Capital, managed by Keith Meister, assembled the most outsized position in IAC/InterActiveCorp (NASDAQ:IAC). Corvex Capital had $148.5 million invested in the company at the end of the quarter. Peter S. Park’s Park West Asset Management also initiated a $80.9 million position during the quarter. The following funds were also among the new IAC investors: Dmitry Balyasny’s Balyasny Asset Management, Alexander Mitchell’s Scopus Asset Management, and John Khabbaz’s Phoenician Capital.

Let’s now take a look at hedge fund activity in other stocks similar to IAC/InterActiveCorp (NASDAQ:IAC). We will take a look at Agilent Technologies Inc. (NYSE:A), Paychex, Inc. (NASDAQ:PAYX), IQVIA Holdings, Inc. (NYSE:IQV), The Hershey Company (NYSE:HSY), CRH PLC (NYSE:CRH), ING Groep N.V. (NYSE:ING), and TE Connectivity Ltd. (NYSE:TEL). This group of stocks’ market caps are similar to IAC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $1458 million. That figure was $4956 million in IAC’s case. IQVIA Holdings, Inc. (NYSE:IQV) is the most popular stock in this table. On the other hand CRH PLC (NYSE:CRH) is the least popular one with only 7 bullish hedge fund positions. IAC/InterActiveCorp (NASDAQ:IAC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for IAC is 78.3. 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. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. Hedge funds were also right about betting on IAC as the stock returned 17.5% since the end of Q2 (through 10/16) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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