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 Total Return Index ETFs returned 31% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same 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 IHS Markit Ltd. (NASDAQ:INFO).
IHS Markit Ltd. (NASDAQ:INFO) has seen an increase in hedge fund sentiment lately. Our calculations also showed that INFO isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now let's analyze the new hedge fund action surrounding IHS Markit Ltd. (NASDAQ:INFO).
What have hedge funds been doing with IHS Markit Ltd. (NASDAQ:INFO)?
At Q3's end, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 7% from the previous quarter. By comparison, 31 hedge funds held shares or bullish call options in INFO a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Farallon Capital held the most valuable stake in IHS Markit Ltd. (NASDAQ:INFO), which was worth $239.1 million at the end of the third quarter. On the second spot was Select Equity Group which amassed $230.2 million worth of shares. Palestra Capital Management, Atalan Capital, and Echo Street Capital 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 Atalan Capital allocated the biggest weight to IHS Markit Ltd. (NASDAQ:INFO), around 6.86% of its 13F portfolio. Sunriver Management is also relatively very bullish on the stock, designating 4.36 percent of its 13F equity portfolio to INFO.
As aggregate interest increased, key hedge funds have jumped into IHS Markit Ltd. (NASDAQ:INFO) headfirst. Point72 Asset Management, managed by Steve Cohen, created the biggest position in IHS Markit Ltd. (NASDAQ:INFO). Point72 Asset Management had $9.5 million invested in the company at the end of the quarter. Principal Global Investors's Columbus Circle Investors also initiated a $8.9 million position during the quarter. The other funds with brand new INFO positions are Robert Pohly's Samlyn Capital, Ronald Hua's Qtron Investments, and Neal Nathani and Darren Dinneen's Totem Point Management.
Let's also examine hedge fund activity in other stocks similar to IHS Markit Ltd. (NASDAQ:INFO). We will take a look at Hilton Worldwide Holdings Inc (NYSE:HLT), Sun Life Financial Inc. (NYSE:SLF), Square, Inc. (NYSE:SQ), and Southern Copper Corporation (NYSE:SCCO). This group of stocks' market valuations match INFO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HLT,48,3928940,4 SLF,12,259612,1 SQ,44,2375472,-9 SCCO,13,175117,-2 Average,29.25,1684785,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $1685 million. That figure was $859 million in INFO's case. Hilton Worldwide Holdings Inc (NYSE:HLT) is the most popular stock in this table. On the other hand Sun Life Financial Inc. (NYSE:SLF) is the least popular one with only 12 bullish hedge fund positions. IHS Markit Ltd. (NASDAQ:INFO) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on INFO as the stock returned 57.2% in 2019 (through December 23rd) and outperformed the market. Hedge funds were rewarded for their relative bullishness. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.