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 Air Products & Chemicals, Inc. (NYSE:APD).
Air Products & Chemicals, Inc. (NYSE:APD) was in 38 hedge funds' portfolios at the end of the third quarter of 2019. APD has experienced an increase in hedge fund sentiment in recent months. There were 32 hedge funds in our database with APD holdings at the end of the previous quarter. Our calculations also showed that APD 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_728376" align="aligncenter" width="1613"] Jonathan Barrett of Luminus Management[/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. Let's take a glance at the new hedge fund action encompassing Air Products & Chemicals, Inc. (NYSE:APD).
What does smart money think about Air Products & Chemicals, Inc. (NYSE:APD)?
At Q3's end, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 19% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in APD over the last 17 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Air Products & Chemicals, Inc. (NYSE:APD) was held by Two Sigma Advisors, which reported holding $93.6 million worth of stock at the end of September. It was followed by Luminus Management with a $78.2 million position. Other investors bullish on the company included AQR Capital Management, Freshford Capital Management, and Adage Capital Management. In terms of the portfolio weights assigned to each position Freshford Capital Management allocated the biggest weight to Air Products & Chemicals, Inc. (NYSE:APD), around 9.38% of its portfolio. Claar Advisors is also relatively very bullish on the stock, earmarking 8.75 percent of its 13F equity portfolio to APD.
Now, key hedge funds have jumped into Air Products & Chemicals, Inc. (NYSE:APD) headfirst. Valinor Management, managed by David Gallo, assembled the largest position in Air Products & Chemicals, Inc. (NYSE:APD). Valinor Management had $20 million invested in the company at the end of the quarter. Matthew Tewksbury's Stevens Capital Management also made a $7.6 million investment in the stock during the quarter. The other funds with brand new APD positions are Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Donald Sussman's Paloma Partners, and Benjamin A. Smith's Laurion Capital Management.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Air Products & Chemicals, Inc. (NYSE:APD) but similarly valued. These stocks are Kimberly Clark Corporation (NYSE:KMB), Waste Management, Inc. (NYSE:WM), American International Group Inc (NYSE:AIG), and TC Energy Corporation (NYSE:TRP). All of these stocks' market caps resemble APD's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KMB,40,1622264,0 WM,46,3533060,11 AIG,49,2451222,8 TRP,18,272298,6 Average,38.25,1969711,6.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 38.25 hedge funds with bullish positions and the average amount invested in these stocks was $1970 million. That figure was $479 million in APD's case. American International Group Inc (NYSE:AIG) is the most popular stock in this table. On the other hand TC Energy Corporation (NYSE:TRP) is the least popular one with only 18 bullish hedge fund positions. Air Products & Chemicals, Inc. (NYSE:APD) 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 APD, though not to the same extent, as the stock returned 6.5% during the first two months of the fourth quarter and outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.