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 Tandem Diabetes Care Inc (NASDAQ:TNDM).
Is Tandem Diabetes Care Inc (NASDAQ:TNDM) a marvelous investment today? Prominent investors are getting more optimistic. The number of long hedge fund bets improved by 1 in recent months. Our calculations also showed that TNDM 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). TNDM was in 34 hedge funds' portfolios at the end of the third quarter of 2019. There were 33 hedge funds in our database with TNDM positions at the end of the previous quarter.
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 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.
[caption id="attachment_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]
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. With all of this in mind we're going to take a look at the new hedge fund action surrounding Tandem Diabetes Care Inc (NASDAQ:TNDM).
What have hedge funds been doing with Tandem Diabetes Care Inc (NASDAQ:TNDM)?
At the end of the third quarter, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the previous quarter. On the other hand, there were a total of 22 hedge funds with a bullish position in TNDM a year ago. With the smart money's capital changing hands, there exists a few notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of Tandem Diabetes Care Inc (NASDAQ:TNDM), with a stake worth $76.3 million reported as of the end of September. Trailing Renaissance Technologies was Redmile Group, which amassed a stake valued at $68.4 million. Consonance Capital Management, Columbus Circle Investors, and OrbiMed Advisors 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 Consonance Capital Management allocated the biggest weight to Tandem Diabetes Care Inc (NASDAQ:TNDM), around 5.97% of its 13F portfolio. Sectoral Asset Management is also relatively very bullish on the stock, setting aside 4.4 percent of its 13F equity portfolio to TNDM.
With a general bullishness amongst the heavyweights, key money managers have jumped into Tandem Diabetes Care Inc (NASDAQ:TNDM) headfirst. Consonance Capital Management, managed by Mitchell Blutt, established the most valuable position in Tandem Diabetes Care Inc (NASDAQ:TNDM). Consonance Capital Management had $60.3 million invested in the company at the end of the quarter. Peter S. Park's Park West Asset Management also initiated a $32.4 million position during the quarter. The other funds with new positions in the stock are Jeffrey Jay and David Kroin's Great Point Partners, Chuck Royce's Royce & Associates, and John Osterweis's Osterweis Capital Management.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Tandem Diabetes Care Inc (NASDAQ:TNDM) but similarly valued. We will take a look at CarGurus, Inc. (NASDAQ:CARG), White Mountains Insurance Group Ltd (NYSE:WTM), Colfax Corporation (NYSE:CFX), and Macquarie Infrastructure Corporation (NYSE:MIC). This group of stocks' market caps are similar to TNDM's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CARG,21,813076,1 WTM,16,185765,-1 CFX,30,652861,3 MIC,26,231644,-2 Average,23.25,470837,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.25 hedge funds with bullish positions and the average amount invested in these stocks was $471 million. That figure was $587 million in TNDM's case. Colfax Corporation (NYSE:CFX) is the most popular stock in this table. On the other hand White Mountains Insurance Group Ltd (NYSE:WTM) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Tandem Diabetes Care Inc (NASDAQ:TNDM) is more popular among hedge funds. 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 TNDM as the stock returned 59.9% so far in 2019 (through 12/23) 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. 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.