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Did Hedge Funds Make The Right Call On SVB Financial Group (SIVB) ?

Asma UL Husna

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards SVB Financial Group (NASDAQ:SIVB) and determine whether hedge funds skillfully traded this stock.

Is SVB Financial Group (NASDAQ:SIVB) a marvelous investment today? The best stock pickers were in a bearish mood. The number of bullish hedge fund positions went down by 5 lately. Our calculations also showed that SIVB 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). SIVB was in 30 hedge funds' portfolios at the end of the first quarter of 2020. There were 35 hedge funds in our database with SIVB positions at the end of the previous quarter. Video: 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 S&P 500 ETFs by 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.

[caption id="attachment_30621" align="aligncenter" width="392"] Cliff Asness of AQR Capital Management[/caption]

AQR CAPITAL MANAGEMENT
AQR CAPITAL MANAGEMENT

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Now we're going to take a look at the key hedge fund action regarding SVB Financial Group (NASDAQ:SIVB).

How are hedge funds trading SVB Financial Group (NASDAQ:SIVB)?

Heading into the second quarter of 2020, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SIVB over the last 18 quarters. With hedgies' sentiment swirling, there exists a few notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Fisher Asset Management was the largest shareholder of SVB Financial Group (NASDAQ:SIVB), with a stake worth $118 million reported as of the end of September. Trailing Fisher Asset Management was Diamond Hill Capital, which amassed a stake valued at $67.1 million. AQR Capital Management, Adage Capital Management, and Columbus Circle Investors 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 Spindletop Capital allocated the biggest weight to SVB Financial Group (NASDAQ:SIVB), around 14.46% of its 13F portfolio. MD Sass is also relatively very bullish on the stock, dishing out 3.28 percent of its 13F equity portfolio to SIVB.

Because SVB Financial Group (NASDAQ:SIVB) has witnessed a decline in interest from the smart money, it's easy to see that there were a few hedgies that slashed their positions entirely last quarter. Interestingly, Ravi Chopra's Azora Capital said goodbye to the largest investment of all the hedgies monitored by Insider Monkey, totaling an estimated $41.6 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital was right behind this move, as the fund said goodbye to about $30.6 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 5 funds last quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as SVB Financial Group (NASDAQ:SIVB) but similarly valued. We will take a look at Vistra Energy Corp. (NYSE:VST), CenterPoint Energy, Inc. (NYSE:CNP), Nordson Corporation (NASDAQ:NDSN), and Erie Indemnity Company (NASDAQ:ERIE). All of these stocks' market caps match SIVB's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VST,39,1440172,-10 CNP,32,560894,2 NDSN,22,98925,-7 ERIE,17,63002,-3 Average,27.5,540748,-4.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $541 million. That figure was $384 million in SIVB's case. Vistra Energy Corp. (NYSE:VST) is the most popular stock in this table. On the other hand Erie Indemnity Company (NASDAQ:ERIE) is the least popular one with only 17 bullish hedge fund positions. SVB Financial Group (NASDAQ:SIVB) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on SIVB as the stock returned 42.7% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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