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Did Hedge Funds Drop The Ball On Intercontinental Exchange Inc (ICE) ?

Asma UL Husna

Hedge funds and other investment firms run by legendary investors like Israel Englander, Jeffrey Talpins and Ray Dalio are entrusted to manage billions of dollars of accredited investors' money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.

Intercontinental Exchange Inc (NYSE:ICE) was in 35 hedge funds' portfolios at the end of March. ICE has experienced a decrease in hedge fund interest of late. There were 41 hedge funds in our database with ICE holdings at the end of the previous quarter. Our calculations also showed that ICE isn't among the 30 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 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.

William Von Mueffling - Cantillon Capital Management

Let's go over the latest hedge fund action surrounding Intercontinental Exchange Inc (NYSE:ICE).

What does the smart money think about Intercontinental Exchange Inc (NYSE:ICE)?

At the end of the first quarter, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ICE over the last 15 quarters. With hedgies' capital changing hands, there exists a few key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

ICE_june2019

The largest stake in Intercontinental Exchange Inc (NYSE:ICE) was held by Cantillon Capital Management, which reported holding $355.3 million worth of stock at the end of March. It was followed by D E Shaw with a $348.9 million position. Other investors bullish on the company included Eminence Capital, Alkeon Capital Management, and Senator Investment Group.

Due to the fact that Intercontinental Exchange Inc (NYSE:ICE) has faced bearish sentiment from hedge fund managers, it's safe to say that there lies a certain "tier" of hedgies who sold off their entire stakes by the end of the third quarter. Interestingly, David Cohen and Harold Levy's Iridian Asset Management sold off the largest position of the "upper crust" of funds followed by Insider Monkey, comprising close to $269.2 million in stock. James Parsons's fund, Junto Capital Management, also dumped its stock, about $76.2 million worth. These transactions are interesting, as total hedge fund interest was cut by 6 funds by the end of the third quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Intercontinental Exchange Inc (NYSE:ICE) but similarly valued. We will take a look at Orange S.A. (NYSE:ORAN), Workday Inc (NASDAQ:WDAY), American Electric Power Company, Inc. (NYSE:AEP), and Kimberly Clark Corporation (NYSE:KMB). This group of stocks' market caps match ICE's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ORAN,2,1103,0 WDAY,33,1399695,2 AEP,35,1229038,1 KMB,36,860286,-1 Average,26.5,872531,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $873 million. That figure was $1778 million in ICE's case. Kimberly Clark Corporation (NYSE:KMB) is the most popular stock in this table. On the other hand Orange S.A. (NYSE:ORAN) is the least popular one with only 2 bullish hedge fund positions. Intercontinental Exchange Inc (NYSE:ICE) 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on ICE as the stock returned 8.5% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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