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 W&T Offshore, Inc. (NYSE:WTI).
Is W&T Offshore, Inc. (NYSE:WTI) an attractive investment today? Hedge funds are taking a pessimistic view. The number of long hedge fund bets retreated by 3 recently. Our calculations also showed that WTI isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). WTI was in 19 hedge funds' portfolios at the end of September. There were 22 hedge funds in our database with WTI positions at the end of the previous quarter. 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_745225" align="aligncenter" width="473"] Noam Gottesman of GLG Partners[/caption]
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 look at the key hedge fund action encompassing W&T Offshore, Inc. (NYSE:WTI).
How have hedgies been trading W&T Offshore, Inc. (NYSE:WTI)?
Heading into the fourth quarter of 2019, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in WTI over the last 17 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies has the most valuable position in W&T Offshore, Inc. (NYSE:WTI), worth close to $42.5 million, comprising less than 0.1%% of its total 13F portfolio. The second largest stake is held by Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which holds a $8.1 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other professional money managers that are bullish contain David E. Shaw's D E Shaw, Noam Gottesman's GLG Partners and Cliff Asness's AQR Capital Management. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to W&T Offshore, Inc. (NYSE:WTI), around 0.28% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, earmarking 0.04 percent of its 13F equity portfolio to WTI.
Because W&T Offshore, Inc. (NYSE:WTI) has witnessed a decline in interest from the smart money, it's easy to see that there lies a certain "tier" of hedgies who sold off their full holdings by the end of the third quarter. At the top of the heap, David Harding's Winton Capital Management dropped the biggest investment of the 750 funds monitored by Insider Monkey, worth about $0.4 million in stock. Mike Vranos's fund, Ellington, also dropped its stock, about $0.2 million worth. These bearish behaviors 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 W&T Offshore, Inc. (NYSE:WTI) but similarly valued. We will take a look at Argan, Inc. (NYSE:AGX), Heritage-Crystal Clean, Inc. (NASDAQ:HCCI), UP Fintech Holding Limited (NASDAQ:TIGR), and Watford Holdings Ltd. (NASDAQ:WTRE). This group of stocks' market valuations resemble WTI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AGX,11,73282,1 HCCI,12,68416,3 TIGR,1,147,-3 WTRE,6,4622,3 Average,7.5,36617,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.5 hedge funds with bullish positions and the average amount invested in these stocks was $37 million. That figure was $73 million in WTI's case. Heritage-Crystal Clean, Inc. (NASDAQ:HCCI) is the most popular stock in this table. On the other hand UP Fintech Holding Limited (NASDAQ:TIGR) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks W&T Offshore, Inc. (NYSE:WTI) is more popular among hedge funds. 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. Unfortunately WTI wasn't nearly as popular as these 20 stocks and hedge funds that were betting on WTI were disappointed as the stock returned -2.1% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.