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Did Hedge Funds Drop The Ball On Colony Capital Inc (CLNY) ?

Nina Todic

Hedge funds run by legendary names like George Soros and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant outperformance. That's why we pay special attention to hedge fund activity in these stocks.

Is Colony Capital Inc (NYSE:CLNY) the right pick for your portfolio? The smart money is in a pessimistic mood. The number of long hedge fund bets fell by 7 recently. Our calculations also showed that CLNY isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

BAUPOST GROUP Seth Klarman

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to go over the recent hedge fund action surrounding Colony Capital Inc (NYSE:CLNY).

What does smart money think about Colony Capital Inc (NYSE:CLNY)?

At Q2's end, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -30% from the first quarter of 2019. By comparison, 28 hedge funds held shares or bullish call options in CLNY a year ago. With hedge funds' sentiment swirling, there exists a select group of key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

No of Hedge Funds with CLNY Positions

More specifically, Baupost Group was the largest shareholder of Colony Capital Inc (NYSE:CLNY), with a stake worth $248.4 million reported as of the end of March. Trailing Baupost Group was Odey Asset Management Group, which amassed a stake valued at $33.4 million. Renaissance Technologies, Tensile Capital, and HBK Investments were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that Colony Capital Inc (NYSE:CLNY) has witnessed bearish sentiment from the smart money, it's easy to see that there was a specific group of money managers that slashed their positions entirely last quarter. Interestingly, D. E. Shaw's D E Shaw dropped the largest investment of all the hedgies monitored by Insider Monkey, worth an estimated $5.3 million in stock, and Jeffrey Hinkle's Shoals Capital Management was right behind this move, as the fund cut about $2.8 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 7 funds last quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Colony Capital Inc (NYSE:CLNY) but similarly valued. We will take a look at American Equity Investment Life Holding Company (NYSE:AEL), CONMED Corporation (NASDAQ:CNMD), Wolverine World Wide, Inc. (NYSE:WWW), and World Fuel Services Corporation (NYSE:INT). This group of stocks' market caps are closest to CLNY's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AEL,17,89771,0 CNMD,19,238590,-2 WWW,12,49072,-7 INT,19,149964,1 Average,16.75,131849,-2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $132 million. That figure was $346 million in CLNY's case. CONMED Corporation (NASDAQ:CNMD) is the most popular stock in this table. On the other hand Wolverine World Wide, Inc. (NYSE:WWW) is the least popular one with only 12 bullish hedge fund positions. Colony Capital Inc (NYSE:CLNY) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on CLNY as the stock returned 22.7% during the same time frame and outperformed the market by an even larger margin.

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

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