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 Fang Holdings Limited (NYSE:SFUN).
Fang Holdings Limited (NYSE:SFUN) investors should be aware of a decrease in hedge fund sentiment of late. SFUN was in 6 hedge funds' portfolios at the end of June. There were 8 hedge funds in our database with SFUN holdings at the end of the previous quarter. Our calculations also showed that SFUN 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.
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 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 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.
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. We're going to take a gander at the recent hedge fund action encompassing Fang Holdings Limited (NYSE:SFUN).
What does smart money think about Fang Holdings Limited (NYSE:SFUN)?
At the end of the second quarter, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SFUN over the last 16 quarters. With hedge funds' sentiment swirling, there exists a few notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
Among these funds, D E Shaw held the most valuable stake in Fang Holdings Limited (NYSE:SFUN), which was worth $0.3 million at the end of the second quarter. On the second spot was Diametric Capital which amassed $0.1 million worth of shares. Moreover, Segantii Capital, Bridgewater Associates, and Two Sigma Advisors were also bullish on Fang Holdings Limited (NYSE:SFUN), allocating a large percentage of their portfolios to this stock.
Judging by the fact that Fang Holdings Limited (NYSE:SFUN) has faced a decline in interest from the smart money, logic holds that there was a specific group of funds who sold off their positions entirely by the end of the second quarter. Interestingly, Israel Englander's Millennium Management sold off the largest investment of all the hedgies followed by Insider Monkey, comprising about $0.4 million in stock. Warren Lammert's fund, Granite Point Capital, also dropped its stock, about $0.2 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 2 funds by the end of the second quarter.
Let's also examine hedge fund activity in other stocks similar to Fang Holdings Limited (NYSE:SFUN). These stocks are North American Construction Group Ltd. (NYSE:NOA), L.B. Foster Company (NASDAQ:FSTR), TuanChe Limited (NASDAQ:TC), and Titan International Inc (NYSE:TWI). All of these stocks' market caps match SFUN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NOA,9,46970,1 FSTR,15,68558,1 TC,2,137,1 TWI,10,73341,-3 Average,9,47252,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $47 million. That figure was $0 million in SFUN's case. L.B. Foster Company (NASDAQ:FSTR) is the most popular stock in this table. On the other hand TuanChe Limited (NASDAQ:TC) is the least popular one with only 2 bullish hedge fund positions. Fang Holdings Limited (NYSE:SFUN) is not the least popular stock in this group but hedge fund interest is still below average. 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 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. Unfortunately SFUN wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SFUN investors were disappointed as the stock returned -28.4% during 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 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.