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% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% 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 Viavi Solutions Inc (NASDAQ:VIAV).
Viavi Solutions Inc (NASDAQ:VIAV) was in 30 hedge funds' portfolios at the end of September. VIAV has experienced an increase in hedge fund interest in recent months. There were 22 hedge funds in our database with VIAV holdings at the end of the previous quarter. Our calculations also showed that VIAV 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).
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 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.
[caption id="attachment_193003" align="aligncenter" width="450"] Chuck Royce of Royce & Associates[/caption]
We leave no stone unturned when looking for the next great investment idea. For example 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. 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. Keeping this in mind let's take a peek at the key hedge fund action surrounding Viavi Solutions Inc (NASDAQ:VIAV).
What have hedge funds been doing with Viavi Solutions Inc (NASDAQ:VIAV)?
Heading into the fourth quarter of 2019, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of 36% from the second quarter of 2019. By comparison, 22 hedge funds held shares or bullish call options in VIAV a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Citadel Investment Group was the largest shareholder of Viavi Solutions Inc (NASDAQ:VIAV), with a stake worth $95.2 million reported as of the end of September. Trailing Citadel Investment Group was Renaissance Technologies, which amassed a stake valued at $78.4 million. Columbus Circle Investors, Arrowstreet Capital, and Millennium Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Adi Capital Management allocated the biggest weight to Viavi Solutions Inc (NASDAQ:VIAV), around 6.97% of its 13F portfolio. Boardman Bay Capital Management is also relatively very bullish on the stock, dishing out 2.69 percent of its 13F equity portfolio to VIAV.
As one would reasonably expect, key hedge funds have jumped into Viavi Solutions Inc (NASDAQ:VIAV) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the biggest position in Viavi Solutions Inc (NASDAQ:VIAV). Arrowstreet Capital had $17.7 million invested in the company at the end of the quarter. Brian Ashford-Russell and Tim Woolley's Polar Capital also initiated a $16.2 million position during the quarter. The following funds were also among the new VIAV investors: Leon Shaulov's Maplelane Capital, Chuck Royce's Royce & Associates, and Paritosh Gupta's Adi Capital Management.
Let's go over hedge fund activity in other stocks similar to Viavi Solutions Inc (NASDAQ:VIAV). We will take a look at Intelsat S.A. (NYSE:I), Avista Corp (NYSE:AVA), BankUnited, Inc. (NYSE:BKU), and Nektar Therapeutics (NASDAQ:NKTR). This group of stocks' market valuations are similar to VIAV's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position I,48,1063619,6 AVA,15,137623,4 BKU,21,420103,2 NKTR,17,154689,-2 Average,25.25,444009,2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $444 million. That figure was $333 million in VIAV's case. Intelsat S.A. (NYSE:I) is the most popular stock in this table. On the other hand Avista Corp (NYSE:AVA) is the least popular one with only 15 bullish hedge fund positions. Viavi Solutions Inc (NASDAQ:VIAV) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on VIAV as the stock returned 51.6% in 2019 (through December 23rd) and outperformed the market. Hedge funds were rewarded for their relative bullishness. 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.