Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren't very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds' top 20 stock picks easily bested the broader market, at 37.4% compared to 27.5%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn't perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
GameStop Corp. (NYSE:GME) was in 20 hedge funds' portfolios at the end of September. GME has seen a decrease in hedge fund sentiment recently. There were 27 hedge funds in our database with GME holdings at the end of the previous quarter. Our calculations also showed that GME isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_365194" align="aligncenter" width="450"] David E. Shaw of D.E. Shaw[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's take a glance at the new hedge fund action encompassing GameStop Corp. (NYSE:GME).
How have hedgies been trading GameStop Corp. (NYSE:GME)?
At Q3's end, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -26% from the previous quarter. By comparison, 20 hedge funds held shares or bullish call options in GME a year ago. With hedge funds' sentiment swirling, there exists a few notable hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
Among these funds, Scion Asset Management held the most valuable stake in GameStop Corp. (NYSE:GME), which was worth $16.6 million at the end of the third quarter. On the second spot was D E Shaw which amassed $8.5 million worth of shares. Millennium Management, Arrowstreet Capital, and EastBay Asset 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 Scion Asset Management allocated the biggest weight to GameStop Corp. (NYSE:GME), around 27.78% of its 13F portfolio. EastBay Asset Management is also relatively very bullish on the stock, dishing out 7.61 percent of its 13F equity portfolio to GME.
Judging by the fact that GameStop Corp. (NYSE:GME) has witnessed declining sentiment from the smart money, we can see that there exists a select few money managers who were dropping their full holdings in the third quarter. At the top of the heap, Renaissance Technologies dumped the biggest position of the "upper crust" of funds monitored by Insider Monkey, comprising about $28 million in stock. Robert Henry Lynch's fund, Aristeia Capital, also cut its stock, about $16.1 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 7 funds in the third quarter.
Let's check out hedge fund activity in other stocks similar to GameStop Corp. (NYSE:GME). These stocks are UroGen Pharma Ltd. (NASDAQ:URGN), Retrophin Inc (NASDAQ:RTRX), Viking Therapeutics, Inc. (NASDAQ:VKTX), and Carter Bank & Trust (NASDAQ:CARE). This group of stocks' market caps are closest to GME's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position URGN,10,77472,-2 RTRX,18,223901,-1 VKTX,15,35723,-2 CARE,4,27685,-1 Average,11.75,91195,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.75 hedge funds with bullish positions and the average amount invested in these stocks was $91 million. That figure was $44 million in GME's case. Retrophin Inc (NASDAQ:RTRX) is the most popular stock in this table. On the other hand Carter Bank & Trust (NASDAQ:CARE) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks GameStop Corp. (NYSE:GME) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on GME as the stock returned 14.9% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.