Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Flexion Therapeutics Inc (NASDAQ:FLXN).
Hedge fund interest in Flexion Therapeutics Inc (NASDAQ:FLXN) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare FLXN to other stocks including Loop Industries, Inc. (NASDAQ:LOOP), Global Indemnity Limited (NASDAQ:GBLI), and Powell Industries, Inc. (NASDAQ:POWL) to get a better sense of its popularity. Our calculations also showed that FLXN 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. Let's take a glance at the new hedge fund action surrounding Flexion Therapeutics Inc (NASDAQ:FLXN).
What does smart money think about Flexion Therapeutics Inc (NASDAQ:FLXN)?
At Q2's end, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in FLXN over the last 16 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).
Among these funds, Miller Value Partners held the most valuable stake in Flexion Therapeutics Inc (NASDAQ:FLXN), which was worth $59.7 million at the end of the second quarter. On the second spot was Kingdon Capital which amassed $11.4 million worth of shares. Moreover, Clearline Capital, Rubric Capital Management, and D E Shaw were also bullish on Flexion Therapeutics Inc (NASDAQ:FLXN), allocating a large percentage of their portfolios to this stock.
Seeing as Flexion Therapeutics Inc (NASDAQ:FLXN) has experienced a decline in interest from the aggregate hedge fund industry, we can see that there lies a certain "tier" of fund managers that decided to sell off their full holdings heading into Q3. It's worth mentioning that Joe DiMenna's ZWEIG DIMENNA PARTNERS sold off the largest position of all the hedgies tracked by Insider Monkey, comprising about $1.1 million in stock, and Jeffrey Talpins's Element Capital Management was right behind this move, as the fund cut about $0.3 million worth. These moves are important to note, 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 Flexion Therapeutics Inc (NASDAQ:FLXN) but similarly valued. We will take a look at Loop Industries, Inc. (NASDAQ:LOOP), Global Indemnity Limited (NASDAQ:GBLI), Powell Industries, Inc. (NASDAQ:POWL), and Noble Corporation plc (NYSE:NE). This group of stocks' market caps are closest to FLXN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LOOP,1,229,-1 GBLI,6,34765,0 POWL,11,32062,2 NE,16,67086,-7 Average,8.5,33536,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.5 hedge funds with bullish positions and the average amount invested in these stocks was $34 million. That figure was $112 million in FLXN's case. Noble Corporation plc (NYSE:NE) is the most popular stock in this table. On the other hand Loop Industries, Inc. (NASDAQ:LOOP) is the least popular one with only 1 bullish hedge fund positions. Flexion Therapeutics Inc (NASDAQ:FLXN) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on FLXN as the stock returned 11.5% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.