Billionaire hedge fund managers such as Steve Cohen and Stan Druckenmiller can generate millions or even billions of dollars every year by pinning down high-potential small-cap stocks and pouring cash into these candidates. Small-cap stocks are overlooked by most investors, brokerage houses, and financial services hubs, while the unlimited research abilities of the big players within the hedge fund industry can easily identify the undervalued and high-potential stocks that reside the ignored corners of equity markets. There are numerous small-cap stocks that have turned out to be great winners, which is one of the main reasons the Insider Monkey team pays close attention to the hedge fund activity in relation to these stocks.
Arlington Asset Investment Corp (NYSE:AI) investors should be aware of a decrease in support from the world's most elite money managers lately. AI was in 5 hedge funds' portfolios at the end of the third quarter of 2018. There were 7 hedge funds in our database with AI positions at the end of the previous quarter. Our calculations also showed that AI isn't among the 30 most popular stocks among hedge funds.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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.
Let's take a gander at the fresh hedge fund action encompassing Arlington Asset Investment Corp (NYSE:AI).
What have hedge funds been doing with Arlington Asset Investment Corp (NYSE:AI)?
At the end of the third quarter, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -29% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards AI over the last 13 quarters. With the smart money's capital changing hands, there exists a few key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
More specifically, Citadel Investment Group was the largest shareholder of Arlington Asset Investment Corp (NYSE:AI), with a stake worth $9.4 million reported as of the end of September. Trailing Citadel Investment Group was Two Sigma Advisors, which amassed a stake valued at $1.1 million. Renaissance Technologies, AQR Capital Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
Because Arlington Asset Investment Corp (NYSE:AI) has experienced falling interest from the smart money, we can see that there was a specific group of money managers who sold off their entire stakes by the end of the third quarter. Interestingly, Mike Vranos's Ellington cut the largest investment of all the hedgies watched by Insider Monkey, worth close to $1.1 million in stock, and D. E. Shaw's D E Shaw was right behind this move, as the fund said goodbye to about $0.1 million worth. These moves are interesting, as total hedge fund interest dropped by 2 funds by the end of the third quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Arlington Asset Investment Corp (NYSE:AI) but similarly valued. These stocks are Corindus Vascular Robotics Inc (NYSEMKT:CVRS), Era Group Inc (NYSE:ERA), InterNAP Network Services (NASDAQ:INAP), and Mudrick Capital Acquisition Corporation (NASDAQ:MUDSU). This group of stocks' market caps are similar to AI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CVRS,8,62250,1 ERA,7,45640,-1 INAP,14,66851,3 MUDSU,10,46863,0 Average,9.75,55401,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.75 hedge funds with bullish positions and the average amount invested in these stocks was $55 million. That figure was $11 million in AI's case. InterNAP Network Services (NASDAQ:INAP) is the most popular stock in this table. On the other hand Era Group Inc (NYSE:ERA) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Arlington Asset Investment Corp (NYSE:AI) is even less popular than ERA. Considering that hedge funds aren't fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn't behind this stock. This isn't necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.
Disclosure: None. This article was originally published at Insider Monkey.