Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds' moves.
Hersha Hospitality Trust (NYSE:HT) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 12 hedge funds' portfolios at the end of the second quarter of 2019. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as DXP Enterprises Inc (NASDAQ:DXPE), Autolus Therapeutics plc (NASDAQ:AUTL), and Jianpu Technology Inc. (NYSE:JT) to gather more data points. Our calculations also showed that HT 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.
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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
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. We're going to review the new hedge fund action surrounding Hersha Hospitality Trust (NYSE:HT).
Hedge fund activity in Hersha Hospitality Trust (NYSE:HT)
Heading into the third quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the first quarter of 2019. On the other hand, there were a total of 10 hedge funds with a bullish position in HT a year ago. With hedgies' sentiment swirling, there exists an "upper tier" of key hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
Among these funds, Balyasny Asset Management held the most valuable stake in Hersha Hospitality Trust (NYSE:HT), which was worth $7.1 million at the end of the second quarter. On the second spot was Millennium Management which amassed $5.2 million worth of shares. Moreover, Citadel Investment Group, GLG Partners, and Two Sigma Advisors were also bullish on Hersha Hospitality Trust (NYSE:HT), allocating a large percentage of their portfolios to this stock.
Seeing as Hersha Hospitality Trust (NYSE:HT) has witnessed bearish sentiment from hedge fund managers, it's safe to say that there were a few funds who were dropping their full holdings last quarter. At the top of the heap, Steve Cohen's Point72 Asset Management cut the largest position of the "upper crust" of funds followed by Insider Monkey, totaling close to $1.1 million in stock. D. E. Shaw's fund, D E Shaw, also dropped its stock, about $0.5 million worth. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Hersha Hospitality Trust (NYSE:HT) but similarly valued. We will take a look at DXP Enterprises Inc (NASDAQ:DXPE), Autolus Therapeutics plc (NASDAQ:AUTL), Jianpu Technology Inc. (NYSE:JT), and China Yuchai International Limited (NYSE:CYD). All of these stocks' market caps are closest to HT's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DXPE,11,67795,-5 AUTL,13,229680,7 JT,4,34758,-3 CYD,9,67669,0 Average,9.25,99976,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $100 million. That figure was $24 million in HT's case. Autolus Therapeutics plc (NASDAQ:AUTL) is the most popular stock in this table. On the other hand Jianpu Technology Inc. (NYSE:JT) is the least popular one with only 4 bullish hedge fund positions. Hersha Hospitality Trust (NYSE:HT) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately HT wasn't nearly as popular as these 20 stocks and hedge funds that were betting on HT were disappointed as the stock returned -8.3% during the third quarter and underperformed 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.