Hedge funds run by legendary names like George Soros and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant outperformance. That's why we pay special attention to hedge fund activity in these stocks.
Aon plc (NYSE:AON) was in 34 hedge funds' portfolios at the end of June. AON has seen a decrease in enthusiasm from smart money in recent months. There were 39 hedge funds in our database with AON holdings at the end of the previous quarter. Our calculations also showed that AON isn't among the 30 most popular stocks among hedge funds.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
[caption id="attachment_30647" align="aligncenter" width="478"] Boykin Curry of Eagle Capital[/caption]
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a look at the fresh hedge fund action regarding Aon plc (NYSE:AON).
What have hedge funds been doing with Aon plc (NYSE:AON)?
Heading into the third quarter of 2019, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AON over the last 16 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, Boykin Curry's Eagle Capital Management has the most valuable position in Aon plc (NYSE:AON), worth close to $879.9 million, comprising 3.1% of its total 13F portfolio. Sitting at the No. 2 spot is First Pacific Advisors LLC, managed by Robert Rodriguez and Steven Romick, which holds a $286.6 million position; 2.5% of its 13F portfolio is allocated to the stock. Remaining peers that hold long positions encompass William von Mueffling's Cantillon Capital Management, David Cohen and Harold Levy's Iridian Asset Management and Andreas Halvorsen's Viking Global.
Due to the fact that Aon plc (NYSE:AON) has faced bearish sentiment from the smart money, we can see that there was a specific group of funds that slashed their full holdings in the second quarter. Interestingly, Ken Griffin's Citadel Investment Group cut the biggest position of the 750 funds followed by Insider Monkey, comprising about $17.6 million in stock. Sander Gerber's fund, Hudson Bay Capital Management, also said goodbye to its stock, about $17.1 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 5 funds in the second quarter.
Let's now review hedge fund activity in other stocks similar to Aon plc (NYSE:AON). These stocks are Marriott International Inc (NASDAQ:MAR), American International Group Inc (NYSE:AIG), Kimberly-Clark Corporation (NYSE:KMB), and Infosys Limited (NYSE:INFY). This group of stocks' market valuations resemble AON's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MAR,27,2521738,2 AIG,41,2270404,4 KMB,40,1546551,4 INFY,25,1151865,5 Average,33.25,1872640,3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.25 hedge funds with bullish positions and the average amount invested in these stocks was $1873 million. That figure was $2528 million in AON's case. American International Group Inc (NYSE:AIG) is the most popular stock in this table. On the other hand Infosys Limited (NYSE:INFY) is the least popular one with only 25 bullish hedge fund positions. Aon plc (NYSE:AON) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately AON wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AON were disappointed as the stock returned 0.5% during the third quarter 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 many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.