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 Agree Realty Corporation (NYSE:ADC).
Agree Realty Corporation (NYSE:ADC) was in 11 hedge funds' portfolios at the end of December. ADC shareholders have witnessed a decrease in hedge fund sentiment lately. There were 14 hedge funds in our database with ADC holdings at the end of the previous quarter. Our calculations also showed that ADC isn't among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's take a peek at the latest hedge fund action regarding Agree Realty Corporation (NYSE:ADC).
How have hedgies been trading Agree Realty Corporation (NYSE:ADC)?
At the end of the fourth quarter, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -21% from the previous quarter. By comparison, 11 hedge funds held shares or bullish call options in ADC a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
The largest stake in Agree Realty Corporation (NYSE:ADC) was held by Citadel Investment Group, which reported holding $21.1 million worth of stock at the end of September. It was followed by D E Shaw with a $10.3 million position. Other investors bullish on the company included Renaissance Technologies, Two Sigma Advisors, and Driehaus Capital.
Due to the fact that Agree Realty Corporation (NYSE:ADC) has faced a decline in interest from the entirety of the hedge funds we track, it's safe to say that there was a specific group of hedgies that decided to sell off their positions entirely heading into Q3. At the top of the heap, Dmitry Balyasny's Balyasny Asset Management said goodbye to the biggest stake of all the hedgies tracked by Insider Monkey, totaling close to $10.2 million in stock. Paul Tudor Jones's fund, Tudor Investment Corp, also said goodbye to its stock, about $1 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 3 funds heading into Q3.
Let's now take a look at hedge fund activity in other stocks similar to Agree Realty Corporation (NYSE:ADC). These stocks are Descartes Systems Group (NASDAQ:DSGX), Xencor Inc (NASDAQ:XNCR), Terex Corporation (NYSE:TEX), and The Ensign Group, Inc. (NASDAQ:ENSG). This group of stocks' market valuations resemble ADC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DSGX,12,66040,3 XNCR,13,211098,-2 TEX,13,258200,-8 ENSG,18,62521,5 Average,14,149465,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $149 million. That figure was $52 million in ADC's case. The Ensign Group, Inc. (NASDAQ:ENSG) is the most popular stock in this table. On the other hand Descartes Systems Group (NASDAQ:DSGX) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Agree Realty Corporation (NYSE:ADC) is even less popular than DSGX. Hedge funds dodged a bullet by taking a bearish stance towards ADC. Our calculations showed that the top 15 most popular hedge fund stocks returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately ADC wasn't nearly as popular as these 15 stock (hedge fund sentiment was very bearish); ADC investors were disappointed as the stock returned 9.9% 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.