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 Index returned approximately 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month 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 Easterly Government Properties Inc (NYSE:DEA).
Easterly Government Properties Inc (NYSE:DEA) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 6 hedge funds' portfolios at the end of the second quarter of 2019. At the end of this article we will also compare DEA to other stocks including Corcept Therapeutics Incorporated (NASDAQ:CORT), Trupanion Inc (NASDAQ:TRUP), and 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) to get a better sense of its popularity. Our calculations also showed that DEA isn't among the 30 most popular stocks among hedge funds (see the video below). 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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a look at the recent hedge fund action surrounding Easterly Government Properties Inc (NYSE:DEA).
How are hedge funds trading Easterly Government Properties Inc (NYSE:DEA)?
At the end of the second quarter, a total of 6 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in DEA over the last 16 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies has the most valuable position in Easterly Government Properties Inc (NYSE:DEA), worth close to $22 million, accounting for less than 0.1%% of its total 13F portfolio. The second largest stake is held by Carlson Capital, managed by Clint Carlson, which holds a $17.8 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Some other professional money managers that hold long positions consist of Jeffrey Furber's AEW Capital Management, Ken Griffin's Citadel Investment Group and Richard Driehaus's Driehaus Capital.
Judging by the fact that Easterly Government Properties Inc (NYSE:DEA) has witnessed falling interest from the smart money, logic holds that there was a specific group of funds that elected to cut their entire stakes by the end of the second quarter. Intriguingly, Dmitry Balyasny's Balyasny Asset Management dropped the largest investment of the "upper crust" of funds monitored by Insider Monkey, valued at an estimated $0.2 million in stock. David Harding's fund, Winton Capital Management, also cut its stock, about $0.2 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Easterly Government Properties Inc (NYSE:DEA) but similarly valued. These stocks are Corcept Therapeutics Incorporated (NASDAQ:CORT), Trupanion Inc (NASDAQ:TRUP), 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS), and Aerie Pharmaceuticals Inc (NASDAQ:AERI). All of these stocks' market caps match DEA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CORT,17,123655,-1 TRUP,10,163287,-3 FLWS,21,85775,2 AERI,18,328780,-5 Average,16.5,175374,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $175 million. That figure was $60 million in DEA's case. 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) is the most popular stock in this table. On the other hand Trupanion Inc (NASDAQ:TRUP) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Easterly Government Properties Inc (NYSE:DEA) is even less popular than TRUP. Hedge funds clearly dropped the ball on DEA as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on DEA as the stock returned 19.1% during the third quarter and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.