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 Index returned approximately 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month 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 Green Brick Partners Inc (NASDAQ:GRBK).
Green Brick Partners Inc (NASDAQ:GRBK) shareholders have witnessed an increase in activity from the world's largest hedge funds recently. Our calculations also showed that GRBK 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.
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.
Unlike other investors who track every movement of the 25 largest hedge funds, our long-short investment strategy relies on hedge fund buy/sell signals given by the 100 best performing hedge funds. We're going to analyze the recent hedge fund action surrounding Green Brick Partners Inc (NASDAQ:GRBK).
Hedge fund activity in Green Brick Partners Inc (NASDAQ:GRBK)
At Q2's end, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 50% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in GRBK over the last 16 quarters. With hedge funds' capital changing hands, there exists an "upper tier" of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
More specifically, Greenlight Capital was the largest shareholder of Green Brick Partners Inc (NASDAQ:GRBK), with a stake worth $200.4 million reported as of the end of March. Trailing Greenlight Capital was Stadium Capital Management, which amassed a stake valued at $12.7 million. Ariel Investments, Birch Run Capital, and Diamond Hill Capital were also very fond of the stock, giving the stock large weights in their portfolios.
With a general bullishness amongst the heavyweights, specific money managers have jumped into Green Brick Partners Inc (NASDAQ:GRBK) headfirst. Citadel Investment Group, managed by Ken Griffin, created the most outsized position in Green Brick Partners Inc (NASDAQ:GRBK). Citadel Investment Group had $0.2 million invested in the company at the end of the quarter. Israel Englander's Millennium Management also initiated a $0.2 million position during the quarter. The other funds with brand new GRBK positions are Thomas Bailard's Bailard Inc, D. E. Shaw's D E Shaw, and Gavin Saitowitz and Cisco J. del Valle's Springbok Capital.
Let's go over hedge fund activity in other stocks similar to Green Brick Partners Inc (NASDAQ:GRBK). We will take a look at NRC Group Holdings Corp. (NYSE:NRCG), America First Multifamily Investors, L.P. (NASDAQ:ATAX), Briggs & Stratton Corporation (NYSE:BGG), and Jernigan Capital Inc (NYSE:JCAP). All of these stocks' market caps are closest to GRBK's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NRCG,8,10470,3 ATAX,3,3357,1 BGG,11,19671,4 JCAP,15,39852,0 Average,9.25,18338,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $18 million. That figure was $255 million in GRBK's case. Jernigan Capital Inc (NYSE:JCAP) is the most popular stock in this table. On the other hand America First Multifamily Investors, L.P. (NASDAQ:ATAX) is the least popular one with only 3 bullish hedge fund positions. Green Brick Partners Inc (NASDAQ:GRBK) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on GRBK as the stock returned 28.8% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.