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Arch Capital Group Ltd. (ACGL): Hedge Funds In Wait-and-See Mode

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A whopping number of 13F filings filed with U.S. Securities and Exchange Commission has been processed by Insider Monkey so that individual investors can look at the overall hedge fund sentiment towards the stocks included in their watchlists. These freshly-submitted public filings disclose money managers’ equity positions as of the end of the three-month period that ended March 31st, so let’s proceed with the discussion of the hedge fund sentiment on Arch Capital Group Ltd. (NASDAQ:ACGL).

Hedge fund interest in Arch Capital Group Ltd. (NASDAQ:ACGL) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that ACGL isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings). At the end of this article we will also compare ACGL to other stocks including Avangrid, Inc. (NYSE:AGR), Masco Corporation (NYSE:MAS), and Altice USA, Inc. (NYSE:ATUS) to get a better sense of its popularity.

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' 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 S&P 500 ETFs by 115 percentage points since March 2017 (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.

Andrew Raab FPR Partners Andy Raab
Andrew Raab FPR Partners Andy Raab

Andrew Raab of FPR Partners

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. With all of this in mind we're going to check out the latest hedge fund action encompassing Arch Capital Group Ltd. (NASDAQ:ACGL).

Do Hedge Funds Think ACGL Is A Good Stock To Buy Now?

At the end of March, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 33 hedge funds with a bullish position in ACGL a year ago. With the smart money's capital changing hands, there exists a few notable hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

Among these funds, FPR Partners held the most valuable stake in Arch Capital Group Ltd. (NASDAQ:ACGL), which was worth $588.9 million at the end of the fourth quarter. On the second spot was Polar Capital which amassed $229.3 million worth of shares. Echo Street Capital Management, Iridian Asset Management, and D E Shaw were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position FPR Partners allocated the biggest weight to Arch Capital Group Ltd. (NASDAQ:ACGL), around 16.15% of its 13F portfolio. Steel Canyon Capital is also relatively very bullish on the stock, setting aside 13.57 percent of its 13F equity portfolio to ACGL.

Because Arch Capital Group Ltd. (NASDAQ:ACGL) has experienced falling interest from hedge fund managers, we can see that there exists a select few hedge funds who were dropping their positions entirely in the first quarter. At the top of the heap, Louis Bacon's Moore Global Investments dumped the largest investment of all the hedgies watched by Insider Monkey, worth close to $27.9 million in stock, and Anand Parekh's Alyeska Investment Group was right behind this move, as the fund cut about $26.8 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's check out hedge fund activity in other stocks similar to Arch Capital Group Ltd. (NASDAQ:ACGL). We will take a look at Avangrid, Inc. (NYSE:AGR), Masco Corporation (NYSE:MAS), Altice USA, Inc. (NYSE:ATUS), Guardant Health, Inc. (NASDAQ:GH), American Airlines Group Inc (NASDAQ:AAL), Teledyne Technologies Incorporated (NYSE:TDY), and GoodRx Holdings, Inc. (NASDAQ:GDRX). This group of stocks' market caps match ACGL's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AGR,15,58976,5 MAS,33,686447,-7 ATUS,48,3599095,-8 GH,41,1747051,-11 AAL,32,561701,-5 TDY,31,827471,3 GDRX,24,488114,-8 Average,32,1138408,-4.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $1138 million. That figure was $1671 million in ACGL's case. Altice USA, Inc. (NYSE:ATUS) is the most popular stock in this table. On the other hand Avangrid, Inc. (NYSE:AGR) is the least popular one with only 15 bullish hedge fund positions. Arch Capital Group Ltd. (NASDAQ:ACGL) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ACGL is 58.7. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 19.3% in 2021 through June 25th and beat the market again by 4.8 percentage points. Unfortunately ACGL wasn't nearly as popular as these 5 stocks and hedge funds that were betting on ACGL were disappointed as the stock returned 2.4% since the end of March (through 6/25) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.