It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. The Standard and Poor’s 500 Index returned approximately 12.1% in the first 5 months of this year (through May 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. 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 Alder Biopharmaceuticals Inc (NASDAQ:ALDR).
Alder Biopharmaceuticals Inc (NASDAQ:ALDR) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 15 hedge funds' portfolios at the end of March. 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 Republic Bancorp, Inc. KY (NASDAQ:RBCAA), Roan Resources, Inc. (NYSE:ROAN), and Quantenna Communications, Inc. (NASDAQ:QTNA) to gather more data points.
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' 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 40 percentage points since May 2014 through May 30, 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 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's take a gander at the recent hedge fund action surrounding Alder Biopharmaceuticals Inc (NASDAQ:ALDR).
How have hedgies been trading Alder Biopharmaceuticals Inc (NASDAQ:ALDR)?
At Q1's end, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2018. On the other hand, there were a total of 17 hedge funds with a bullish position in ALDR a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Redmile Group held the most valuable stake in Alder Biopharmaceuticals Inc (NASDAQ:ALDR), which was worth $88.8 million at the end of the first quarter. On the second spot was Samlyn Capital which amassed $43.5 million worth of shares. Moreover, Citadel Investment Group, Foresite Capital, and Partner Fund Management were also bullish on Alder Biopharmaceuticals Inc (NASDAQ:ALDR), allocating a large percentage of their portfolios to this stock.
Since Alder Biopharmaceuticals Inc (NASDAQ:ALDR) has faced bearish sentiment from the aggregate hedge fund industry, it's safe to say that there was a specific group of funds that slashed their positions entirely last quarter. At the top of the heap, Steve Cohen's Point72 Asset Management dropped the biggest stake of all the hedgies followed by Insider Monkey, totaling about $4.6 million in stock, and Jerome Pfund and Michael Sjostrom's Sectoral Asset Management was right behind this move, as the fund sold off about $1.3 million worth. These moves are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Alder Biopharmaceuticals Inc (NASDAQ:ALDR) but similarly valued. We will take a look at Republic Bancorp, Inc. (NASDAQ:RBCAA), Roan Resources, Inc. (NYSE:ROAN), Quantenna Communications, Inc. (NASDAQ:QTNA), and The Chefs Warehouse, Inc (NASDAQ:CHEF). This group of stocks' market values resemble ALDR's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RBCAA,7,16406,0 ROAN,18,310071,4 QTNA,23,173264,1 CHEF,10,46595,0 Average,14.5,136584,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $137 million. That figure was $325 million in ALDR's case. Quantenna Communications, Inc. (NASDAQ:QTNA) is the most popular stock in this table. On the other hand Republic Bancorp, Inc. KY (NASDAQ:RBCAA) is the least popular one with only 7 bullish hedge fund positions. Alder Biopharmaceuticals Inc (NASDAQ:ALDR) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately ALDR wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ALDR were disappointed as the stock returned -15.4% during the same period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.