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 31.2% last year. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% 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 Columbia Sportswear Company (NASDAQ:COLM).
Is Columbia Sportswear Company (NASDAQ:COLM) a buy here? The smart money is in a bearish mood. The number of bullish hedge fund positions retreated by 1 recently. Our calculations also showed that COLM 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). COLM was in 26 hedge funds' portfolios at the end of the third quarter of 2019. There were 27 hedge funds in our database with COLM positions at the end of the previous quarter.
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.
[caption id="attachment_30621" align="alignnone" width="600"] Cliff Asness of AQR Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 is still extremely cheap despite already gaining 20 percent. Keeping this in mind let's review the latest hedge fund action regarding Columbia Sportswear Company (NASDAQ:COLM).
How have hedgies been trading Columbia Sportswear Company (NASDAQ:COLM)?
At the end of the third quarter, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from one quarter earlier. By comparison, 23 hedge funds held shares or bullish call options in COLM a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
The largest stake in Columbia Sportswear Company (NASDAQ:COLM) was held by Arrowstreet Capital, which reported holding $48.6 million worth of stock at the end of September. It was followed by AQR Capital Management with a $38.3 million position. Other investors bullish on the company included Citadel Investment Group, Broad Bay Capital, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Broad Bay Capital allocated the biggest weight to Columbia Sportswear Company (NASDAQ:COLM), around 3.81% of its 13F portfolio. Beddow Capital Management is also relatively very bullish on the stock, earmarking 0.22 percent of its 13F equity portfolio to COLM.
Because Columbia Sportswear Company (NASDAQ:COLM) has experienced declining sentiment from the entirety of the hedge funds we track, logic holds that there exists a select few hedgies that elected to cut their entire stakes by the end of the third quarter. It's worth mentioning that Steve Cohen's Point72 Asset Management dropped the biggest investment of the "upper crust" of funds followed by Insider Monkey, comprising close to $15.5 million in stock. Charles Davidson and Joseph Jacobs's fund, Wexford Capital, also sold off its stock, about $2.6 million worth. These moves are interesting, as total hedge fund interest fell by 1 funds by the end of the third quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Columbia Sportswear Company (NASDAQ:COLM) but similarly valued. These stocks are Alliance Data Systems Corporation (NYSE:ADS), Robert Half International Inc. (NYSE:RHI), Steel Dynamics, Inc. (NASDAQ:STLD), and PVH Corp (NYSE:PVH). This group of stocks' market valuations match COLM's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ADS,35,1242255,1 RHI,21,577040,-5 STLD,25,515633,-6 PVH,27,1027637,-5 Average,27,840641,-3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $841 million. That figure was $155 million in COLM's case. Alliance Data Systems Corporation (NYSE:ADS) is the most popular stock in this table. On the other hand Robert Half International Inc. (NYSE:RHI) is the least popular one with only 21 bullish hedge fund positions. Columbia Sportswear Company (NASDAQ:COLM) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately COLM wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); COLM investors were disappointed as the stock returned 20.3% in 2019 and trailed 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 65 percent of these stocks already outperformed the market in 2019. 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.