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 Alliance Resource Partners, L.P. (NASDAQ:ARLP).
Is Alliance Resource Partners, L.P. (NASDAQ:ARLP) a marvelous stock to buy now? The best stock pickers are becoming less hopeful. The number of long hedge fund positions fell by 1 lately. Our calculations also showed that ARLP isn't among the 30 most popular stocks among hedge funds. ARLP was in 8 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 9 hedge funds in our database with ARLP positions at the end of the previous quarter.
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 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.
We're going to review the fresh hedge fund action encompassing Alliance Resource Partners, L.P. (NASDAQ:ARLP).
How are hedge funds trading Alliance Resource Partners, L.P. (NASDAQ:ARLP)?
At Q4's end, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the second quarter of 2018. By comparison, 7 hedge funds held shares or bullish call options in ARLP a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Magnolia Capital Fund, managed by Adam Peterson, holds the largest position in Alliance Resource Partners, L.P. (NASDAQ:ARLP). Magnolia Capital Fund has a $47.4 million position in the stock, comprising 7.4% of its 13F portfolio. The second most bullish fund manager is Mountain Lake Investment Management, led by Mitch Cantor, holding a $23 million position; the fund has 12.6% of its 13F portfolio invested in the stock. Some other peers that hold long positions consist of Bernard Selz's Selz Capital, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital and Jim Simons's Renaissance Technologies.
Seeing as Alliance Resource Partners, L.P. (NASDAQ:ARLP) has faced bearish sentiment from the aggregate hedge fund industry, it's safe to say that there is a sect of funds that slashed their entire stakes by the end of the third quarter. It's worth mentioning that Paul Marshall and Ian Wace's Marshall Wace LLP cut the biggest investment of the 700 funds monitored by Insider Monkey, valued at an estimated $8 million in stock, and Matthew Hulsizer's PEAK6 Capital Management was right behind this move, as the fund dropped about $0.3 million worth. These moves are important to note, as total hedge fund interest fell by 1 funds by the end of the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to Alliance Resource Partners, L.P. (NASDAQ:ARLP). These stocks are Tempur Sealy International Inc. (NYSE:TPX), Patterson-UTI Energy, Inc. (NASDAQ:PTEN), frontdoor, inc. (NASDAQ:FTDR), and InterDigital, Inc. (NASDAQ:IDCC). All of these stocks' market caps are closest to ARLP's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TPX,31,1015114,1 PTEN,39,235916,8 FTDR,24,189778,22 IDCC,21,138794,3 Average,28.75,394901,8.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.75 hedge funds with bullish positions and the average amount invested in these stocks was $395 million. That figure was $97 million in ARLP's case. Patterson-UTI Energy, Inc. (NASDAQ:PTEN) is the most popular stock in this table. On the other hand InterDigital, Inc. (NASDAQ:IDCC) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Alliance Resource Partners, L.P. (NASDAQ:ARLP) is even less popular than IDCC. Hedge funds dodged a bullet by taking a bearish stance towards ARLP. 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 ARLP wasn't nearly as popular as these 15 stock (hedge fund sentiment was very bearish); ARLP investors were disappointed as the stock returned 11.7% 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.