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Hedge Funds Are Getting Burned By Insmed Incorporated (INSM)

Abigail Fisher

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 24.4% during the first 9 months of 2019 and outperformed the broader market benchmark by 4 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Insmed Incorporated (NASDAQ:INSM) was in 23 hedge funds' portfolios at the end of the second quarter of 2019. INSM has experienced an increase in hedge fund interest recently. There were 18 hedge funds in our database with INSM holdings at the end of the previous quarter. Our calculations also showed that INSM isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

INSM_oct2019

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a look at the fresh hedge fund action regarding Insmed Incorporated (NASDAQ:INSM).

Hedge fund activity in Insmed Incorporated (NASDAQ:INSM)

At the end of the second quarter, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of 28% from one quarter earlier. On the other hand, there were a total of 20 hedge funds with a bullish position in INSM a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

[caption id="attachment_758402" align="aligncenter" width="450"] William Leland Edwards of Palo Alto Investors[/caption]

William Leland Edwards of Palo Alto Investors

Among these funds, Palo Alto Investors held the most valuable stake in Insmed Incorporated (NASDAQ:INSM), which was worth $202 million at the end of the second quarter. On the second spot was Baker Bros. Advisors which amassed $63 million worth of shares. Moreover, Citadel Investment Group, D E Shaw, and Vivo Capital were also bullish on Insmed Incorporated (NASDAQ:INSM), allocating a large percentage of their portfolios to this stock.

As one would reasonably expect, specific money managers were breaking ground themselves. Consonance Capital Management, managed by Mitchell Blutt, created the most valuable position in Insmed Incorporated (NASDAQ:INSM). Consonance Capital Management had $43.8 million invested in the company at the end of the quarter. Brian Ashford-Russell and Tim Woolley's Polar Capital also made a $12.6 million investment in the stock during the quarter. The other funds with brand new INSM positions are Benjamin A. Smith's Laurion Capital Management, Anand Parekh's Alyeska Investment Group, and Louis Bacon's Moore Global Investments.

Let's also examine hedge fund activity in other stocks similar to Insmed Incorporated (NASDAQ:INSM). We will take a look at Acceleron Pharma Inc (NASDAQ:XLRN), Simmons First National Corporation (NASDAQ:SFNC), Taylor Morrison Home Corp (NYSE:TMHC), and Alliance Resource Partners, L.P. (NASDAQ:ARLP). This group of stocks' market valuations are similar to INSM's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XLRN,21,349171,0 SFNC,12,31976,3 TMHC,19,259749,7 ARLP,9,102943,1 Average,15.25,185960,2.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $186 million. That figure was $596 million in INSM's case. Acceleron Pharma Inc (NASDAQ:XLRN) is the most popular stock in this table. On the other hand Alliance Resource Partners, L.P. (NASDAQ:ARLP) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Insmed Incorporated (NASDAQ:INSM) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately INSM wasn't nearly as popular as these 20 stocks and hedge funds that were betting on INSM were disappointed as the stock returned -31.1% during the third 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 many of these stocks already outperformed the market in Q3.

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

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