Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 27.5% through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. 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 Veoneer, Inc. (NYSE:VNE).
Is Veoneer, Inc. (NYSE:VNE) a splendid investment now? Money managers are becoming less confident. The number of long hedge fund bets retreated by 2 recently. Our calculations also showed that VNE 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.
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_749689" align="aligncenter" width="473"] Christer Gardell of Cevian Capital[/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 review the recent hedge fund action regarding Veoneer, Inc. (NYSE:VNE).
Hedge fund activity in Veoneer, Inc. (NYSE:VNE)
Heading into the fourth quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the second quarter of 2019. On the other hand, there were a total of 10 hedge funds with a bullish position in VNE 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.
The largest stake in Veoneer, Inc. (NYSE:VNE) was held by Cevian Capital, which reported holding $120.3 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $19.6 million position. Other investors bullish on the company included Millennium Management, Ulysses Management, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Cevian Capital allocated the biggest weight to Veoneer, Inc. (NYSE:VNE), around 21.04% of its 13F portfolio. Ulysses Management is also relatively very bullish on the stock, dishing out 0.2 percent of its 13F equity portfolio to VNE.
Because Veoneer, Inc. (NYSE:VNE) has faced declining sentiment from hedge fund managers, it's safe to say that there was a specific group of money managers that decided to sell off their full holdings in the third quarter. At the top of the heap, Joseph Samuels's Islet Management cut the largest position of the 750 funds tracked by Insider Monkey, valued at close to $6.5 million in stock, and Robert Henry Lynch's Aristeia Capital was right behind this move, as the fund sold off about $2.6 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 2 funds in the third quarter.
Let's also examine hedge fund activity in other stocks similar to Veoneer, Inc. (NYSE:VNE). We will take a look at U.S. Physical Therapy, Inc. (NYSE:USPH), Calavo Growers, Inc. (NASDAQ:CVGW), SailPoint Technologies Holdings, Inc. (NYSE:SAIL), and Banco Macro SA (NYSE:BMA). This group of stocks' market valuations resemble VNE's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position USPH,12,64630,1 CVGW,17,108346,2 SAIL,23,226214,1 BMA,11,95493,1 Average,15.75,123671,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $124 million. That figure was $150 million in VNE's case. SailPoint Technologies Holdings, Inc. (NYSE:SAIL) is the most popular stock in this table. On the other hand Banco Macro SA (NYSE:BMA) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Veoneer, Inc. (NYSE:VNE) is even less popular than BMA. 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 VNE, though not to the same extent, as the stock returned 8% during the fourth quarter (through 11/30) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.