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 20% in the first 9 months of this year (through September 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority 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' consensus 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 LivePerson, Inc. (NASDAQ:LPSN).
LivePerson, Inc. (NASDAQ:LPSN) investors should be aware of a decrease in enthusiasm from smart money of late. Our calculations also showed that LPSN isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 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 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.
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. Let's take a glance at the key hedge fund action surrounding LivePerson, Inc. (NASDAQ:LPSN).
How are hedge funds trading LivePerson, Inc. (NASDAQ:LPSN)?
At Q2's end, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards LPSN over the last 16 quarters. With hedge funds' capital changing hands, there exists a select group of noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
The largest stake in LivePerson, Inc. (NASDAQ:LPSN) was held by RGM Capital, which reported holding $57.9 million worth of stock at the end of March. It was followed by Polar Capital with a $42.7 million position. Other investors bullish on the company included Portolan Capital Management, Two Sigma Advisors, and Diker Management.
Seeing as LivePerson, Inc. (NASDAQ:LPSN) has witnessed declining sentiment from the smart money, it's safe to say that there was a specific group of funds that elected to cut their full holdings heading into Q3. Interestingly, Israel Englander's Millennium Management said goodbye to the largest investment of the "upper crust" of funds followed by Insider Monkey, totaling an estimated $15.4 million in stock, and Josh Goldberg's G2 Investment Partners Management was right behind this move, as the fund dropped about $3.3 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 4 funds heading into Q3.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as LivePerson, Inc. (NASDAQ:LPSN) but similarly valued. These stocks are Fastly, Inc. (NYSE:FSLY), BancFirst Corporation (NASDAQ:BANF), Golar LNG Limited (NASDAQ:GLNG), and Cott Corporation (NYSE:COT). All of these stocks' market caps resemble LPSN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FSLY,13,96728,13 BANF,9,47285,-2 GLNG,23,347857,-5 COT,27,415487,-1 Average,18,226839,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $227 million. That figure was $174 million in LPSN's case. Cott Corporation (NYSE:COT) is the most popular stock in this table. On the other hand BancFirst Corporation (NASDAQ:BANF) is the least popular one with only 9 bullish hedge fund positions. LivePerson, Inc. (NASDAQ:LPSN) 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 LPSN as the stock returned 27.3% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.