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Hedge Funds Cashed Out Of NetEase, Inc (NTES) A Bit Too Early

Abigail Fisher

As we already know from media reports and hedge fund investor letters, hedge funds delivered their best returns in a decade. Most investors who decided to stick with hedge funds after a rough 2018 recouped their losses by the end of the third quarter. We get to see hedge funds' thoughts towards the market and individual stocks by aggregating their quarterly portfolio movements and reading their investor letters. In this article, we will particularly take a look at what hedge funds think about NetEase, Inc (NASDAQ:NTES).

NetEase, Inc (NASDAQ:NTES) has seen a decrease in hedge fund interest in recent months. NTES was in 30 hedge funds' portfolios at the end of September. There were 34 hedge funds in our database with NTES positions at the end of the previous quarter. Our calculations also showed that NTES 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.

5 Most Popular Stocks Among Hedge Funds

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_26575" align="aligncenter" width="471"] Louis Bacon Moore of Moore Capital[/caption]

MOORE GLOBAL INVESTMENTS

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a gander at the latest hedge fund action surrounding NetEase, Inc (NASDAQ:NTES).

How have hedgies been trading NetEase, Inc (NASDAQ:NTES)?

At the end of the third quarter, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -12% from the second quarter of 2019. By comparison, 26 hedge funds held shares or bullish call options in NTES a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

NTES_dec2019

Among these funds, Orbis Investment Management held the most valuable stake in NetEase, Inc (NASDAQ:NTES), which was worth $2496.9 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $225 million worth of shares. Steadfast Capital Management, Coatue Management, and Renaissance Technologies 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 Orbis Investment Management allocated the biggest weight to NetEase, Inc (NASDAQ:NTES), around 18.44% of its portfolio. Sensato Capital Management is also relatively very bullish on the stock, designating 5.14 percent of its 13F equity portfolio to NTES.

Seeing as NetEase, Inc (NASDAQ:NTES) has witnessed bearish sentiment from the entirety of the hedge funds we track, logic holds that there is a sect of hedge funds who were dropping their positions entirely last quarter. Intriguingly, Daniel Gold's QVT Financial dumped the biggest investment of all the hedgies watched by Insider Monkey, valued at about $2.6 million in stock, and Paul Hondros's AlphaOne Capital Partners was right behind this move, as the fund said goodbye to about $1.8 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 4 funds last quarter.

Let's now take a look at hedge fund activity in other stocks similar to NetEase, Inc (NASDAQ:NTES). These stocks are Xcel Energy Inc (NASDAQ:XEL), Thomson Reuters Corporation (NYSE:TRI), Lam Research Corporation (NASDAQ:LRCX), and General Mills, Inc. (NYSE:GIS). This group of stocks' market valuations match NTES's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XEL,17,573407,-1 TRI,19,360770,2 LRCX,47,2130443,12 GIS,35,916081,-4 Average,29.5,995175,2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $995 million. That figure was $3513 million in NTES's case. Lam Research Corporation (NASDAQ:LRCX) is the most popular stock in this table. On the other hand Xcel Energy Inc (NASDAQ:XEL) is the least popular one with only 17 bullish hedge fund positions. NetEase, Inc (NASDAQ:NTES) is not the most popular stock in this group but hedge fund interest is still above 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. Hedge funds were also right about betting on NTES as the stock returned 18.5% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

Disclosure: None. This article was originally published at Insider Monkey.

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