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 Tripadvisor Inc (NASDAQ:TRIP).
Tripadvisor Inc (NASDAQ:TRIP) has experienced an increase in enthusiasm from smart money recently. TRIP was in 29 hedge funds' portfolios at the end of the third quarter of 2019. There were 26 hedge funds in our database with TRIP holdings at the end of the previous quarter. Our calculations also showed that TRIP 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_30621" align="aligncenter" width="487"] Cliff Asness of AQR Capital Management[/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. Now we're going to review the new hedge fund action surrounding Tripadvisor Inc (NASDAQ:TRIP).
Hedge fund activity in Tripadvisor Inc (NASDAQ:TRIP)
Heading into the fourth quarter of 2019, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 12% from the previous quarter. On the other hand, there were a total of 26 hedge funds with a bullish position in TRIP a year ago. With hedgies' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
The largest stake in Tripadvisor Inc (NASDAQ:TRIP) was held by Eagle Capital Management, which reported holding $345 million worth of stock at the end of September. It was followed by Bares Capital Management with a $172.2 million position. Other investors bullish on the company included AQR Capital Management, D E Shaw, and PAR Capital Management. In terms of the portfolio weights assigned to each position Incline Global Management allocated the biggest weight to Tripadvisor Inc (NASDAQ:TRIP), around 6.17% of its 13F portfolio. Bares Capital Management is also relatively very bullish on the stock, dishing out 5.17 percent of its 13F equity portfolio to TRIP.
Consequently, key hedge funds have been driving this bullishness. Incline Global Management, managed by Jeff Lignelli, initiated the most outsized position in Tripadvisor Inc (NASDAQ:TRIP). Incline Global Management had $28.9 million invested in the company at the end of the quarter. Dmitry Balyasny's Balyasny Asset Management also made a $12.1 million investment in the stock during the quarter. The other funds with brand new TRIP positions are Charles Davidson and Joseph Jacobs's Wexford Capital, Brandon Haley's Holocene Advisors, and Ray Dalio's Bridgewater Associates.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Tripadvisor Inc (NASDAQ:TRIP) but similarly valued. These stocks are Flex Ltd. (NASDAQ:FLEX), Leggett & Platt, Incorporated (NYSE:LEG), ITT Inc. (NYSE:ITT), and Pegasystems Inc. (NASDAQ:PEGA). This group of stocks' market valuations resemble TRIP's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FLEX,31,1478106,-3 LEG,10,53164,1 ITT,20,516984,-5 PEGA,23,733352,-1 Average,21,695402,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $695 million. That figure was $1051 million in TRIP's case. Flex Ltd. (NASDAQ:FLEX) is the most popular stock in this table. On the other hand Leggett & Platt, Incorporated (NYSE:LEG) is the least popular one with only 10 bullish hedge fund positions. Tripadvisor Inc (NASDAQ:TRIP) 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 TRIP wasn't nearly as popular as these 20 stocks and hedge funds that were betting on TRIP were disappointed as the stock returned -36.7% 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.