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 Total Return Index ETFs returned 27.5% through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this 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' consensus 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 Prothena Corporation plc (NASDAQ:PRTA).
Prothena Corporation plc (NASDAQ:PRTA) was in 17 hedge funds' portfolios at the end of the third quarter of 2019. PRTA investors should pay attention to a decrease in hedge fund sentiment in recent months. There were 18 hedge funds in our database with PRTA holdings at the end of the previous quarter. Our calculations also showed that PRTA 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.
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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_728973" align="aligncenter" width="1613"] Oleg Nodelman of EcoR1 Capital[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds' buy/sell signals. Let's take a look at the key hedge fund action surrounding Prothena Corporation plc (NASDAQ:PRTA).
What have hedge funds been doing with Prothena Corporation plc (NASDAQ:PRTA)?
At Q3's end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards PRTA over the last 17 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
The largest stake in Prothena Corporation plc (NASDAQ:PRTA) was held by EcoR1 Capital, which reported holding $73.9 million worth of stock at the end of September. It was followed by OrbiMed Advisors with a $23.7 million position. Other investors bullish on the company included Great Point Partners, Citadel Investment Group, and Millennium Management. In terms of the portfolio weights assigned to each position EcoR1 Capital allocated the biggest weight to Prothena Corporation plc (NASDAQ:PRTA), around 9.33% of its 13F portfolio. Great Point Partners is also relatively very bullish on the stock, earmarking 1.49 percent of its 13F equity portfolio to PRTA.
Due to the fact that Prothena Corporation plc (NASDAQ:PRTA) has experienced bearish sentiment from the entirety of the hedge funds we track, we can see that there lies a certain "tier" of fund managers who were dropping their positions entirely heading into Q4. Interestingly, Neil Woodford's Woodford Investment Management dropped the biggest stake of the 750 funds monitored by Insider Monkey, comprising an estimated $92.7 million in stock, and Paul Marshall and Ian Wace's Marshall Wace was right behind this move, as the fund dropped about $1.8 million worth. These moves are important to note, as aggregate hedge fund interest fell by 1 funds heading into Q4.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Prothena Corporation plc (NASDAQ:PRTA) but similarly valued. These stocks are Golden Star Resources Ltd. (NYSEAMEX:GSS), Natural Resource Partners LP (NYSE:NRP), CEL-SCI Corporation (NYSEAMEX:CVM), and Source Capital, Inc. (NYSE:SOR). All of these stocks' market caps match PRTA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GSS,3,6932,-3 NRP,5,16842,-1 CVM,5,1807,3 SOR,2,8353,0 Average,3.75,8484,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 3.75 hedge funds with bullish positions and the average amount invested in these stocks was $8 million. That figure was $157 million in PRTA's case. Natural Resource Partners LP (NYSE:NRP) is the most popular stock in this table. On the other hand Source Capital, Inc. (NYSE:SOR) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Prothena Corporation plc (NASDAQ:PRTA) is more popular among hedge funds. 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 PRTA as the stock returned 63.5% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.