It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year (through September 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. 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 Gates Industrial Corporation plc (NYSE:GTES).
Gates Industrial Corporation plc (NYSE:GTES) has experienced an increase in support from the world's most elite money managers lately. GTES was in 13 hedge funds' portfolios at the end of the second quarter of 2019. There were 9 hedge funds in our database with GTES holdings at the end of the previous quarter. Our calculations also showed that GTES isn't among the 30 most popular stocks among hedge funds (view 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 take a gander at the new hedge fund action surrounding Gates Industrial Corporation plc (NYSE:GTES).
What have hedge funds been doing with Gates Industrial Corporation plc (NYSE:GTES)?
At the end of the second quarter, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 44% from one quarter earlier. On the other hand, there were a total of 9 hedge funds with a bullish position in GTES a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
Among these funds, Marshall Wace LLP held the most valuable stake in Gates Industrial Corporation plc (NYSE:GTES), which was worth $4.8 million at the end of the second quarter. On the second spot was Millennium Management which amassed $3.9 million worth of shares. Moreover, Citadel Investment Group, Arrowstreet Capital, and Renaissance Technologies were also bullish on Gates Industrial Corporation plc (NYSE:GTES), allocating a large percentage of their portfolios to this stock.
Consequently, key hedge funds were breaking ground themselves. AQR Capital Management, managed by Cliff Asness, assembled the biggest position in Gates Industrial Corporation plc (NYSE:GTES). AQR Capital Management had $0.3 million invested in the company at the end of the quarter. Bruce Kovner's Caxton Associates LP also made a $0.2 million investment in the stock during the quarter. The other funds with new positions in the stock are David Harding's Winton Capital Management, Paul Tudor Jones's Tudor Investment Corp, and D. E. Shaw's D E Shaw.
Let's also examine hedge fund activity in other stocks similar to Gates Industrial Corporation plc (NYSE:GTES). We will take a look at AmeriGas Partners, L.P. (NYSE:APU), Switch, Inc. (NYSE:SWCH), Darling Ingredients Inc. (NYSE:DAR), and Taro Pharmaceutical Industries Ltd. (NYSE:TARO). All of these stocks' market caps resemble GTES's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position APU,8,80334,2 SWCH,13,220988,-3 DAR,16,193087,-3 TARO,10,72472,0 Average,11.75,141720,-1 [/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 $142 million. That figure was $17 million in GTES's case. Darling Ingredients Inc. (NYSE:DAR) is the most popular stock in this table. On the other hand AmeriGas Partners, L.P. (NYSE:APU) is the least popular one with only 8 bullish hedge fund positions. Gates Industrial Corporation plc (NYSE:GTES) 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 GTES wasn't nearly as popular as these 20 stocks and hedge funds that were betting on GTES were disappointed as the stock returned -11.7% 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.