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FactSet Research Systems Inc. (FDS) Fell Out Of Favor With Hedge Funds?

Asma UL Husna
·7 mins read

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards FactSet Research Systems Inc. (NYSE:FDS) and determine whether hedge funds skillfully traded this stock.

FactSet Research Systems Inc. (NYSE:FDS) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 21 hedge funds' portfolios at the end of June. Our calculations also showed that FDS isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare FDS to other stocks including Seagate Technology plc (NASDAQ:STX), Masimo Corporation (NASDAQ:MASI), and AngloGold Ashanti Limited (NYSE:AU) to get a better sense of its popularity. Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by 58 percentage points since March 2017 (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.

Tom Gayner
Tom Gayner

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let's check out the new hedge fund action regarding FactSet Research Systems Inc. (NYSE:FDS).

What does smart money think about FactSet Research Systems Inc. (NYSE:FDS)?

At the end of June, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards FDS over the last 20 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Echo Street Capital Management held the most valuable stake in FactSet Research Systems Inc. (NYSE:FDS), which was worth $53.1 million at the end of the third quarter. On the second spot was GLG Partners which amassed $42.4 million worth of shares. Markel Gayner Asset Management, Millennium Management, and Citadel Investment Group 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 Markel Gayner Asset Management allocated the biggest weight to FactSet Research Systems Inc. (NYSE:FDS), around 0.71% of its 13F portfolio. Quantamental Technologies is also relatively very bullish on the stock, designating 0.64 percent of its 13F equity portfolio to FDS.

Judging by the fact that FactSet Research Systems Inc. (NYSE:FDS) has experienced bearish sentiment from hedge fund managers, logic holds that there is a sect of fund managers that elected to cut their positions entirely by the end of the second quarter. It's worth mentioning that Dmitry Balyasny's Balyasny Asset Management cut the largest stake of the "upper crust" of funds watched by Insider Monkey, worth about $22.8 million in stock. Paul Tudor Jones's fund, Tudor Investment Corp, also cut its stock, about $1.5 million worth. These bearish behaviors are intriguing to say the least, as aggregate 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 FactSet Research Systems Inc. (NYSE:FDS) but similarly valued. These stocks are Seagate Technology plc (NASDAQ:STX), Masimo Corporation (NASDAQ:MASI), AngloGold Ashanti Limited (NYSE:AU), Godaddy Inc (NYSE:GDDY), Cheniere Energy, Inc. (NYSE:LNG), Atmos Energy Corporation (NYSE:ATO), and Fair Isaac Corporation (NYSE:FICO). This group of stocks' market values are closest to FDS's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STX,27,2100119,-5 MASI,32,160712,1 AU,16,726270,-3 GDDY,55,2539026,1 LNG,38,2123554,-1 ATO,22,152893,1 FICO,36,1222830,-5 Average,32.3,1289343,-1.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.3 hedge funds with bullish positions and the average amount invested in these stocks was $1289 million. That figure was $201 million in FDS's case. Godaddy Inc (NYSE:GDDY) is the most popular stock in this table. On the other hand AngloGold Ashanti Limited (NYSE:AU) is the least popular one with only 16 bullish hedge fund positions. FactSet Research Systems Inc. (NYSE:FDS) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for FDS is 37.7. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately FDS wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); FDS investors were disappointed as the stock returned 2.2% in the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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Disclosure: None. This article was originally published at Insider Monkey.

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