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Did Hedge Funds Drop The Ball On Frontline Ltd (FRO) ?

Abigail Fisher

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space.

Frontline Ltd (NYSE:FRO) shareholders have witnessed an increase in activity from the world's largest hedge funds of late. FRO was in 10 hedge funds' portfolios at the end of March. There were 6 hedge funds in our database with FRO positions at the end of the previous quarter. Our calculations also showed that FRO isn't among the 30 most popular stocks among hedge funds.

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.

Crispin Odey

We're going to review the fresh hedge fund action encompassing Frontline Ltd (NYSE:FRO).

What have hedge funds been doing with Frontline Ltd (NYSE:FRO)?

At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 67% from the fourth quarter of 2018. On the other hand, there were a total of 4 hedge funds with a bullish position in FRO a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

FRO_june2019

More specifically, Odey Asset Management Group was the largest shareholder of Frontline Ltd (NYSE:FRO), with a stake worth $21.2 million reported as of the end of March. Trailing Odey Asset Management Group was Renaissance Technologies, which amassed a stake valued at $7.7 million. Citadel Investment Group, Citadel Investment Group, and PEAK6 Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

As industrywide interest jumped, specific money managers have jumped into Frontline Ltd (NYSE:FRO) headfirst. PEAK6 Capital Management, managed by Matthew Hulsizer, established the largest position in Frontline Ltd (NYSE:FRO). PEAK6 Capital Management had $0.8 million invested in the company at the end of the quarter. Israel Englander's Millennium Management also initiated a $0.6 million position during the quarter. The other funds with brand new FRO positions are Cliff Asness's AQR Capital Management, Andrew Weiss's Weiss Asset Management, and Paul Marshall and Ian Wace's Marshall Wace LLP.

Let's go over hedge fund activity in other stocks similar to Frontline Ltd (NYSE:FRO). These stocks are Easterly Government Properties Inc (NYSE:DEA), Enterprise Financial Services Corp (NASDAQ:EFSC), MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI), and Canadian Solar Inc. (NASDAQ:CSIQ). This group of stocks' market caps are similar to FRO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DEA,6,78261,1 EFSC,15,52852,0 MTSI,16,134289,1 CSIQ,11,122280,0 Average,12,96921,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $97 million. That figure was $32 million in FRO's case. MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) is the most popular stock in this table. On the other hand Easterly Government Properties Inc (NYSE:DEA) is the least popular one with only 6 bullish hedge fund positions. Frontline Ltd (NYSE:FRO) 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on FRO as the stock returned 19.8% 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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