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Assured Guaranty Ltd. (AGO): Hedge Funds De-risking

Asma UL Husna

The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn't the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds' positions on March 31st, about a week after the S&P 500 Index bottomed. We at Insider Monkey have made an extensive database of more than 821 of those established hedge funds and famous value investors' filings. In this article, we analyze how these elite funds and prominent investors traded Assured Guaranty Ltd. (NYSE:AGO) based on those filings.

Assured Guaranty Ltd. (NYSE:AGO) investors should be aware of a decrease in activity from the world's largest hedge funds recently. Our calculations also showed that AGO isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 58 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

[caption id="attachment_30600" align="aligncenter" width="399"] Bruce Kovner of Caxton Associates LP[/caption]

Bruce Kovner, Caxton Associates LP

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one as well as this tiny lithium play. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we're going to take a look at the recent hedge fund action surrounding Assured Guaranty Ltd. (NYSE:AGO).

How are hedge funds trading Assured Guaranty Ltd. (NYSE:AGO)?

At the end of the first quarter, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AGO over the last 18 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, AQR Capital Management, managed by Cliff Asness, holds the most valuable position in Assured Guaranty Ltd. (NYSE:AGO). AQR Capital Management has a $92.1 million position in the stock, comprising 0.2% of its 13F portfolio. On AQR Capital Management's heels is Kahn Brothers, holding a $37.8 million position; the fund has 6.9% of its 13F portfolio invested in the stock. Remaining members of the smart money that hold long positions include Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Noam Gottesman's GLG Partners and Robert Pohly's Samlyn Capital. In terms of the portfolio weights assigned to each position Sonic Capital allocated the biggest weight to Assured Guaranty Ltd. (NYSE:AGO), around 11.17% of its 13F portfolio. Tegean Capital Management is also relatively very bullish on the stock, earmarking 11.11 percent of its 13F equity portfolio to AGO.

Due to the fact that Assured Guaranty Ltd. (NYSE:AGO) has experienced bearish sentiment from the aggregate hedge fund industry, logic holds that there exists a select few hedgies that elected to cut their positions entirely in the first quarter. At the top of the heap, Frank Brosens's Taconic Capital cut the largest stake of the 750 funds watched by Insider Monkey, comprising close to $44.1 million in stock, and William C. Martin's Raging Capital Management was right behind this move, as the fund cut about $18.6 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 5 funds in the first quarter.

Let's also examine hedge fund activity in other stocks similar to Assured Guaranty Ltd. (NYSE:AGO). These stocks are W.R. Grace & Co. (NYSE:GRA), Amicus Therapeutics, Inc. (NASDAQ:FOLD), Envista Holdings Corporation (NYSE:NVST), and Tripadvisor Inc (NASDAQ:TRIP). This group of stocks' market values are closest to AGO's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GRA,35,866211,-11 FOLD,28,842269,-7 NVST,22,273772,-20 TRIP,30,492031,-9 Average,28.75,618571,-11.75 [/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 $619 million. That figure was $300 million in AGO's case. W.R. Grace & Co. (NYSE:GRA) is the most popular stock in this table. On the other hand Envista Holdings Corporation (NYSE:NVST) is the least popular one with only 22 bullish hedge fund positions. Assured Guaranty Ltd. (NYSE:AGO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 8.3% in 2020 through the end of May and surpassed the market by 13.2 percentage points. Unfortunately AGO wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); AGO investors were disappointed as the stock returned 1.3% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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

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