Were These Hedge Funds Wrong About Flocking Into Arch Capital Group Ltd. (ACGL)?

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 Arch Capital Group Ltd. (NASDAQ:ACGL).

Arch Capital Group Ltd. (NASDAQ:ACGL) shareholders have witnessed an increase in enthusiasm from smart money in recent months. Arch Capital Group Ltd. (NASDAQ:ACGL) was in 36 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 33. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ACGL 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.

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 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Andrew Raab of FPR Partners

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 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 we’re going to analyze the recent hedge fund action regarding Arch Capital Group Ltd. (NASDAQ:ACGL).

How are hedge funds trading Arch Capital Group Ltd. (NASDAQ:ACGL)?

Heading into the third quarter of 2020, a total of 36 of the hedge funds tracked by Insider Monkey were long this stock, a change of 9% from one quarter earlier. On the other hand, there were a total of 23 hedge funds with a bullish position in ACGL a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, FPR Partners, managed by Bob Peck and Andy Raab, holds the number one position in Arch Capital Group Ltd. (NASDAQ:ACGL). FPR Partners has a $395.9 million position in the stock, comprising 13.8% of its 13F portfolio. Coming in second is Polar Capital, led by Brian Ashford-Russell and Tim Woolley, holding a $154.8 million position; 1.3% of its 13F portfolio is allocated to the company. Some other peers that hold long positions consist of Steve Cohen’s Point72 Asset Management, Ken Griffin’s Citadel Investment Group and Greg Poole’s Echo Street Capital Management. In terms of the portfolio weights assigned to each position FPR Partners allocated the biggest weight to Arch Capital Group Ltd. (NASDAQ:ACGL), around 13.77% of its 13F portfolio. Capital Returns Management is also relatively very bullish on the stock, earmarking 9.91 percent of its 13F equity portfolio to ACGL.

As one would reasonably expect, key money managers were breaking ground themselves. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the biggest position in Arch Capital Group Ltd. (NASDAQ:ACGL). Balyasny Asset Management had $22.5 million invested in the company at the end of the quarter. Louis Bacon’s Moore Global Investments also made a $11 million investment in the stock during the quarter. The other funds with new positions in the stock are Jeff Osher’s No Street Capital, Joe DiMenna’s ZWEIG DIMENNA PARTNERS, and Daniel Johnson’s Gillson Capital.

Let’s go over hedge fund activity in other stocks similar to Arch Capital Group Ltd. (NASDAQ:ACGL). We will take a look at PagSeguro Digital Ltd. (NYSE:PAGS), Expedia Group Inc (NASDAQ:EXPE), Brown & Brown, Inc. (NYSE:BRO), Open Text Corporation (NASDAQ:OTEX), Ceridian HCM Holding Inc. (NYSE:CDAY), Shinhan Financial Group Co., Ltd. (NYSE:SHG), and Ulta Beauty, Inc. (NASDAQ:ULTA). This group of stocks’ market values are similar to ACGL’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.6 hedge funds with bullish positions and the average amount invested in these stocks was $1120 million. That figure was $1077 million in ACGL’s case. Expedia Group Inc (NASDAQ:EXPE) is the most popular stock in this table. On the other hand Shinhan Financial Group Co., Ltd. (NYSE:SHG) is the least popular one with only 2 bullish hedge fund positions. Arch Capital Group Ltd. (NASDAQ:ACGL) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ACGL is 66.8. 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 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately ACGL wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ACGL were disappointed as the stock returned 5.4% since the end of June (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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