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 31.2% last year. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% 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 Slack Technologies Inc (NYSE:WORK).
Slack Technologies Inc (NYSE:WORK) has experienced a decrease in activity from the world's largest hedge funds recently. Our calculations also showed that WORK isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_681361" align="aligncenter" width="473"] Glen Kacher of Light Street 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 is still extremely cheap despite already gaining 20 percent. With all of this in mind we're going to go over the latest hedge fund action surrounding Slack Technologies Inc (NYSE:WORK).
How are hedge funds trading Slack Technologies Inc (NYSE:WORK)?
At Q3's end, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -27% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards WORK over the last 17 quarters. With the smart money's capital changing hands, there exists a few key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Light Street Capital, managed by Glen Kacher, holds the most valuable position in Slack Technologies Inc (NYSE:WORK). Light Street Capital has a $115.9 million position in the stock, comprising 8.3% of its 13F portfolio. Sitting at the No. 2 spot is 12 West Capital Management, led by Joel Ramin, holding a $36.9 million position; 2.4% of its 13F portfolio is allocated to the stock. Other members of the smart money with similar optimism consist of Chase Coleman's Tiger Global Management, Daniel Lascano's Lomas Capital Management and Roberto Mignone's Bridger Management. In terms of the portfolio weights assigned to each position General Equity Partners allocated the biggest weight to Slack Technologies Inc (NYSE:WORK), around 10.66% of its 13F portfolio. Light Street Capital is also relatively very bullish on the stock, dishing out 8.31 percent of its 13F equity portfolio to WORK.
Judging by the fact that Slack Technologies Inc (NYSE:WORK) has experienced a decline in interest from hedge fund managers, it's easy to see that there exists a select few money managers that slashed their entire stakes heading into Q4. Interestingly, Andreas Halvorsen's Viking Global dumped the largest stake of the "upper crust" of funds watched by Insider Monkey, valued at close to $170.2 million in stock. Sculptor Capital, also said goodbye to its stock, about $82.9 million worth. These moves are interesting, as total hedge fund interest was cut by 10 funds heading into Q4.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Slack Technologies Inc (NYSE:WORK) but similarly valued. We will take a look at Gartner Inc (NYSE:IT), CBOE Holdings, Inc (NASDAQ:CBOE), Agnico Eagle Mines Limited (NYSE:AEM), and Annaly Capital Management, Inc. (NYSE:NLY). This group of stocks' market values match WORK's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IT,19,659624,2 CBOE,23,1076442,-1 AEM,30,382337,4 NLY,15,97109,-6 Average,21.75,553878,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $554 million. That figure was $326 million in WORK's case. Agnico Eagle Mines Limited (NYSE:AEM) is the most popular stock in this table. On the other hand Annaly Capital Management, Inc. (NYSE:NLY) is the least popular one with only 15 bullish hedge fund positions. Slack Technologies Inc (NYSE:WORK) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately WORK wasn't nearly as popular as these 20 stocks and hedge funds that were betting on WORK were disappointed as the stock returned -41.8% in 2019 and trailed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.