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Did Hedge Funds Drop The Ball On Epizyme Inc (EPZM) ?

Nina Todic

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 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-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 Epizyme Inc (NASDAQ:EPZM).

Epizyme Inc (NASDAQ:EPZM) was in 17 hedge funds' portfolios at the end of September. EPZM investors should be aware of a decrease in hedge fund sentiment in recent months. There were 21 hedge funds in our database with EPZM positions at the end of the previous quarter. Our calculations also showed that EPZM 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.

5 Most Popular Stocks Among Hedge Funds

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_364887" align="aligncenter" width="488"] Kris Jenner of Rock Springs Capital Management[/caption]

Kris Jenner - Rock Springs Capital

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now let's view the recent hedge fund action encompassing Epizyme Inc (NASDAQ:EPZM).

What does smart money think about Epizyme Inc (NASDAQ:EPZM)?

Heading into the fourth quarter of 2019, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from the second quarter of 2019. By comparison, 15 hedge funds held shares or bullish call options in EPZM a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

Among these funds, Redmile Group held the most valuable stake in Epizyme Inc (NASDAQ:EPZM), which was worth $89.1 million at the end of the third quarter. On the second spot was Palo Alto Investors which amassed $65.5 million worth of shares. Consonance Capital Management, Rock Springs Capital Management, and Opaleye Management 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 Opaleye Management allocated the biggest weight to Epizyme Inc (NASDAQ:EPZM), around 5.09% of its 13F portfolio. Palo Alto Investors is also relatively very bullish on the stock, earmarking 4.37 percent of its 13F equity portfolio to EPZM.

Judging by the fact that Epizyme Inc (NASDAQ:EPZM) has experienced a decline in interest from hedge fund managers, logic holds that there exists a select few fund managers that decided to sell off their entire stakes in the third quarter. It's worth mentioning that Steve Cohen's Point72 Asset Management dumped the largest position of the 750 funds watched by Insider Monkey, totaling about $9.2 million in stock, and Nick Thakore's Diametric Capital was right behind this move, as the fund sold off about $2 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 4 funds in the third quarter.

Let's go over hedge fund activity in other stocks similar to Epizyme Inc (NASDAQ:EPZM). We will take a look at Third Point Reinsurance Ltd (NYSE:TPRE), Amphastar Pharmaceuticals Inc (NASDAQ:AMPH), SpringWorks Therapeutics, Inc. (NASDAQ:SWTX), and Sirius International Insurance Group, Ltd. (NASDAQ:SG). All of these stocks' market caps match EPZM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TPRE,19,68008,-1 AMPH,9,36976,0 SWTX,11,382035,11 SG,3,2416,2 Average,10.5,122359,3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.5 hedge funds with bullish positions and the average amount invested in these stocks was $122 million. That figure was $266 million in EPZM's case. Third Point Reinsurance Ltd (NYSE:TPRE) is the most popular stock in this table. On the other hand Sirius International Insurance Group, Ltd. (NASDAQ:SG) is the least popular one with only 3 bullish hedge fund positions. Epizyme Inc (NASDAQ:EPZM) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on EPZM as the stock returned 60.1% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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