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Did Hedge Funds Drop The Ball On Splunk Inc (SPLK) ?

Reymerlyn Martin

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 returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% 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' 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 Splunk Inc (NASDAQ:SPLK).

Is Splunk Inc (NASDAQ:SPLK) a sound stock to buy now? The smart money is taking a pessimistic view. The number of bullish hedge fund positions went down by 14 lately. Our calculations also showed that SPLK isn't among the 30 most popular stocks among hedge funds. SPLK was in 25 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 39 hedge funds in our database with SPLK positions at the end of the previous quarter.

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 32 percentage points since May 2014 through March 12, 2019 (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.

BlueMountain Capital Management's Returns, AUM and Holdings

We're going to take a look at the recent hedge fund action surrounding Splunk Inc (NASDAQ:SPLK).

What does the smart money think about Splunk Inc (NASDAQ:SPLK)?

Heading into the first quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -36% from the previous quarter. On the other hand, there were a total of 36 hedge funds with a bullish position in SPLK a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

SPLK_mar2019

Among these funds, Point72 Asset Management held the most valuable stake in Splunk Inc (NASDAQ:SPLK), which was worth $111.9 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $94.6 million worth of shares. Moreover, Holocene Advisors, Citadel Investment Group, and PEAK6 Capital Management were also bullish on Splunk Inc (NASDAQ:SPLK), allocating a large percentage of their portfolios to this stock.

Judging by the fact that Splunk Inc (NASDAQ:SPLK) has faced declining sentiment from the smart money, we can see that there were a few funds that decided to sell off their full holdings last quarter. At the top of the heap, Josh Resnick's Jericho Capital Asset Management sold off the largest position of all the hedgies monitored by Insider Monkey, comprising close to $64.8 million in call options, and Brandon Haley's Holocene Advisors was right behind this move, as the fund dropped about $30.8 million worth. These moves are important to note, as total hedge fund interest dropped by 14 funds last quarter.

Let's now review hedge fund activity in other stocks similar to Splunk Inc (NASDAQ:SPLK). We will take a look at Avangrid, Inc. (NYSE:AGR), Fifth Third Bancorp (NASDAQ:FITB), KeyCorp (NYSE:KEY), and IAC/InterActiveCorp (NASDAQ:IAC). This group of stocks' market values match SPLK's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AGR,13,347814,-5 FITB,31,775233,7 KEY,33,383374,-8 IAC,50,1927773,-1 Average,31.75,858549,-1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.75 hedge funds with bullish positions and the average amount invested in these stocks was $859 million. That figure was $466 million in SPLK's case. IAC/InterActiveCorp (NASDAQ:IAC) is the most popular stock in this table. On the other hand Avangrid, Inc. (NYSE:AGR) is the least popular one with only 13 bullish hedge fund positions. Splunk Inc (NASDAQ:SPLK) 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 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. A handful of hedge funds were also right about betting on Splunk, as the stock returned 21.4% and outperformed the market as well.

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

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