It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. The Standard and Poor’s 500 Index returned approximately 5.7% in the 12 months ending October 26 (including dividend payments). Conversely, hedge funds’ 30 preferred S&P 500 stocks (as of June 2018) generated a return of 15.1% during the same 12-month period, with 53% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. 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 Audentes Therapeutics, Inc. (NASDAQ:BOLD).
Is Audentes Therapeutics, Inc. (NASDAQ:BOLD) a bargain? Hedge funds are getting less optimistic. The number of bullish hedge fund positions went down by 6 lately. Our calculations also showed that BOLD 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Let's take a glance at the key hedge fund action encompassing Audentes Therapeutics, Inc. (NASDAQ:BOLD).
How have hedgies been trading Audentes Therapeutics, Inc. (NASDAQ:BOLD)?
At the end of the third quarter, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -26% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards BOLD over the last 13 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Redmile Group was the largest shareholder of Audentes Therapeutics, Inc. (NASDAQ:BOLD), with a stake worth $88.8 million reported as of the end of September. Trailing Redmile Group was OrbiMed Advisors, which amassed a stake valued at $86.3 million. Partner Fund Management, Casdin Capital, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
Since Audentes Therapeutics, Inc. (NASDAQ:BOLD) has witnessed a decline in interest from the aggregate hedge fund industry, it's safe to say that there exists a select few hedgies that slashed their positions entirely by the end of the third quarter. Interestingly, Joseph Edelman's Perceptive Advisors dropped the largest stake of the "upper crust" of funds monitored by Insider Monkey, comprising an estimated $25.2 million in stock. Israel Englander's fund, Millennium Management, also said goodbye to its stock, about $12.9 million worth. These transactions are interesting, as total hedge fund interest was cut by 6 funds by the end of the third quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Audentes Therapeutics, Inc. (NASDAQ:BOLD) but similarly valued. These stocks are Boingo Wireless Inc (NASDAQ:WIFI), Employers Holdings, Inc. (NYSE:EIG), La-Z-Boy Incorporated (NYSE:LZB), and Eaton Vance Ltd Duration Income Fund (NYSEMKT:EVV). This group of stocks' market caps are closest to BOLD's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WIFI,17,201486,4 EIG,15,67928,-1 LZB,17,96751,2 EVV,5,60562,-1 Average,13.5,106682,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $107 million. That figure was $403 million in BOLD's case. Boingo Wireless Inc (NASDAQ:WIFI) is the most popular stock in this table. On the other hand Eaton Vance Ltd Duration Income Fund (NYSEMKT:EVV) is the least popular one with only 5 bullish hedge fund positions. Audentes Therapeutics, Inc. (NASDAQ:BOLD) 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. In this regard WIFI might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.