Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like BeiGene, Ltd. (NASDAQ:BGNE).
Is BeiGene, Ltd. (NASDAQ:BGNE) a sound stock to buy now? Prominent investors are getting less optimistic. The number of bullish hedge fund bets retreated by 3 in recent months. Our calculations also showed that BGNE isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
[caption id="attachment_338175" align="aligncenter" width="2480"] Felix Baker of Baker Bros.[/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 based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let's view the latest hedge fund action encompassing BeiGene, Ltd. (NASDAQ:BGNE).
What does smart money think about BeiGene, Ltd. (NASDAQ:BGNE)?
Heading into the fourth quarter of 2019, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the previous quarter. On the other hand, there were a total of 23 hedge funds with a bullish position in BGNE a year ago. With the smart money's capital changing hands, there exists a few noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
Among these funds, Baker Bros. Advisors held the most valuable stake in BeiGene, Ltd. (NASDAQ:BGNE), which was worth $1442.2 million at the end of the third quarter. On the second spot was Hillhouse Capital Management which amassed $670.1 million worth of shares. Indus Capital, Rock Springs Capital Management, and Clough Capital Partners 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 Baker Bros. Advisors allocated the biggest weight to BeiGene, Ltd. (NASDAQ:BGNE), around 9.81% of its 13F portfolio. Hillhouse Capital Management is also relatively very bullish on the stock, designating 9.21 percent of its 13F equity portfolio to BGNE.
Due to the fact that BeiGene, Ltd. (NASDAQ:BGNE) has experienced bearish sentiment from the aggregate hedge fund industry, we can see that there were a few fund managers who sold off their entire stakes by the end of the third quarter. Intriguingly, Jeremy Green's Redmile Group cut the largest position of the "upper crust" of funds followed by Insider Monkey, valued at close to $4.9 million in stock. Israel Englander's fund, Millennium Management, also dumped its stock, about $4.4 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 3 funds by the end of the third quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as BeiGene, Ltd. (NASDAQ:BGNE) but similarly valued. We will take a look at Genpact Limited (NYSE:G), China Southern Airlines Co Ltd (NYSE:ZNH), Albemarle Corporation (NYSE:ALB), and Ralph Lauren Corporation (NYSE:RL). This group of stocks' market valuations match BGNE's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position G,35,862399,9 ZNH,2,12318,1 ALB,17,148538,-1 RL,31,842866,-4 Average,21.25,466530,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $467 million. That figure was $2186 million in BGNE's case. Genpact Limited (NYSE:G) is the most popular stock in this table. On the other hand China Southern Airlines Co Ltd (NYSE:ZNH) is the least popular one with only 2 bullish hedge fund positions. BeiGene, Ltd. (NASDAQ:BGNE) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on BGNE as the stock returned 66% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.