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 China Telecom Corporation Limited (NYSE:CHA).
China Telecom Corporation Limited (NYSE:CHA) investors should be aware of an increase in hedge fund sentiment in recent months. Our calculations also showed that CHA 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.
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_746893" align="aligncenter" width="473"] Paul Marshall of Marshall Wace[/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. 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 also rely on the best performing hedge funds' buy/sell signals. We're going to take a gander at the latest hedge fund action regarding China Telecom Corporation Limited (NYSE:CHA).
Hedge fund activity in China Telecom Corporation Limited (NYSE:CHA)
At the end of the third quarter, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 14% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CHA over the last 17 quarters. With hedge funds' capital changing hands, there exists an "upper tier" of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
The largest stake in China Telecom Corporation Limited (NYSE:CHA) was held by Renaissance Technologies, which reported holding $13.1 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $7.5 million position. Other investors bullish on the company included Marshall Wace, Millennium Management, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Sensato Capital Management allocated the biggest weight to China Telecom Corporation Limited (NYSE:CHA), around 0.09% of its 13F portfolio. Stevens Capital Management is also relatively very bullish on the stock, designating 0.02 percent of its 13F equity portfolio to CHA.
Consequently, specific money managers were breaking ground themselves. Marshall Wace, managed by Paul Marshall and Ian Wace, established the most outsized position in China Telecom Corporation Limited (NYSE:CHA). Marshall Wace had $1.6 million invested in the company at the end of the quarter.
Let's also examine hedge fund activity in other stocks similar to China Telecom Corporation Limited (NYSE:CHA). We will take a look at Welltower Inc. (NYSE:WELL), Canadian Imperial Bank of Commerce (NYSE:CM), Ford Motor Company (NYSE:F), and Prudential Financial Inc (NYSE:PRU). This group of stocks' market values are closest to CHA's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WELL,15,364970,-2 CM,15,220104,3 F,35,1152594,-4 PRU,27,576526,-6 Average,23,578549,-2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $579 million. That figure was $24 million in CHA's case. Ford Motor Company (NYSE:F) is the most popular stock in this table. On the other hand Welltower Inc. (NYSE:WELL) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks China Telecom Corporation Limited (NYSE:CHA) is even less popular than WELL. Hedge funds dodged a bullet by taking a bearish stance towards CHA. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CHA wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CHA investors were disappointed as the stock returned -16.9% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.