Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. 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 U.S. Silica Holdings Inc (NYSE:SLCA).
U.S. Silica Holdings Inc (NYSE:SLCA) investors should pay attention to a decrease in hedge fund interest of late. Our calculations also showed that SLCA isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
[caption id="attachment_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. We're going to check out the latest hedge fund action encompassing U.S. Silica Holdings Inc (NYSE:SLCA).
How have hedgies been trading U.S. Silica Holdings Inc (NYSE:SLCA)?
At the end of the third quarter, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from one quarter earlier. By comparison, 16 hedge funds held shares or bullish call options in SLCA a year ago. With hedgies' sentiment swirling, there exists a few noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
More specifically, Ariel Investments was the largest shareholder of U.S. Silica Holdings Inc (NYSE:SLCA), with a stake worth $108.4 million reported as of the end of September. Trailing Ariel Investments was Rima Senvest Management, which amassed a stake valued at $41.3 million. Renaissance Technologies, Citadel Investment Group, and Royce & Associates 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 Rima Senvest Management allocated the biggest weight to U.S. Silica Holdings Inc (NYSE:SLCA), around 3.56% of its 13F portfolio. Ariel Investments is also relatively very bullish on the stock, designating 1.44 percent of its 13F equity portfolio to SLCA.
Since U.S. Silica Holdings Inc (NYSE:SLCA) has faced bearish sentiment from the entirety of the hedge funds we track, logic holds that there is a sect of funds that decided to sell off their entire stakes by the end of the third quarter. Intriguingly, Ken Grossman and Glen Schneider's SG Capital Management said goodbye to the biggest investment of the 750 funds tracked by Insider Monkey, valued at close to $21.2 million in call options. Israel Englander's fund, Millennium Management, also sold off its call options, about $10.9 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 1 funds by the end of the third quarter.
Let's go over hedge fund activity in other stocks similar to U.S. Silica Holdings Inc (NYSE:SLCA). We will take a look at JinkoSolar Holding Co., Ltd. (NYSE:JKS), NextCure, Inc. (NASDAQ:NXTC), Astec Industries, Inc. (NASDAQ:ASTE), and Emerald Expositions Events, Inc. (NYSE:EEX). This group of stocks' market valuations are closest to SLCA's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JKS,6,14103,-2 NXTC,8,189131,0 ASTE,13,83531,2 EEX,14,12181,7 Average,10.25,74737,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $75 million. That figure was $198 million in SLCA's case. Emerald Expositions Events, Inc. (NYSE:EEX) is the most popular stock in this table. On the other hand JinkoSolar Holding Co., Ltd. (NYSE:JKS) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks U.S. Silica Holdings Inc (NYSE:SLCA) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately SLCA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on SLCA were disappointed as the stock returned -48.4% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.