It was a rough third quarter for many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 7% during the quarter. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by about 14 percentage points between June 25 and October 30, as investors fled less-known quantities for safe havens. This was the case with hedge funds, who we heard were pulling money from the market amid the volatility, which included money from small-cap stocks, which they invest in at a higher rate than other investors. This action contributed to the greater decline in these stocks during the tumultuous period. We will study how this market volatility affected their sentiment towards Western Asset High Yield Defined Opportunity Fund Inc. (NYSE:HYI) during the quarter below.
Is Western Asset High Yield Defined Opportunity Fund Inc. (NYSE:HYI) ready to rally soon? The best stock pickers are turning less bullish. The number of long hedge fund bets stayed the same which is a slightly negative development in our experience. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity, but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Lionbridge Technologies, Inc. (NASDAQ:LIOX), Sorrentto Therapeutics Inc (NASDAQ:SRNE), and Amyris Inc (NASDAQ:AMRS) to gather more data points.
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In the eyes of most stock holders, hedge funds are seen as worthless, old investment vehicles of the past. While there are over 8000 funds in operation at the moment, we choose to focus on the top tier of this club, approximately 700 funds. These investment experts direct the lion’s share of the hedge fund industry’s total capital, and by monitoring their first-class equity investments, Insider Monkey has discovered many investment strategies that have historically outperformed the market. Insider Monkey’s small-cap hedge fund strategy outpaced the S&P 500 index by 12 percentage points per annum for a decade in their back tests.
Now, let’s take a look at the key action surrounding Western Asset High Yield Defined Opportunity Fund Inc. (NYSE:HYI).
How are hedge funds trading Western Asset High Yield Defined Opportunity Fund Inc. (NYSE:HYI)?
At the end of Q3, a total of 4 of the hedge funds tracked by Insider Monkey held long positions in this stock, flat over the last quarter. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Boaz Weinstein’s Saba Capital has the number one position in Western Asset High Yield Defined Opportunity Fund Inc. (NYSE:HYI), worth close to $19 million, amounting to 1.5% of its total 13F portfolio. On Saba Capital’s heels is Martin Whitman of Third Avenue Management, with a $7.9 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Other peers that hold long positions comprise Brian Taylor’s Pine River Capital Management and Clint Carlson’s Carlson Capital.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.
Let’s now review hedge fund activity in other stocks similar to Western Asset High Yield Defined Opportunity Fund Inc. (NYSE:HYI). These stocks are Lionbridge Technologies, Inc. (NASDAQ:LIOX), Sorrentto Therapeutics Inc (NASDAQ:SRNE), Amyris Inc (NASDAQ:AMRS), and Telenav Inc (NASDAQ:TNAV). This group of stocks’ market valuations resembles HYI’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LIOX | 16 | 57854 | 1 |
| SRNE | 13 | 58933 | 3 |
| AMRS | 4 | 4374 | -1 |
| TNAV | 16 | 66295 | -4 |
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 $47 million, slightly higher than the $34 million in Western Asset High Yield Defined Opportunity Fund Inc. (NYSE:HYI)’s case. Lionbridge Technologies, Inc. (NASDAQ:LIOX) is the most popular stock in this table and Amyris Inc (NASDAQ:AMRS) is the least popular one with only four hedge funds holding stakes. Compared to these stocks Western Asset High Yield Defined Opportunity Fund Inc. (NYSE:HYI) is even less popular than Amyris Inc (NASDAQ:AMRS). Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.