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 ETFs returned approximately 27.5% through the end of November (including dividend payments). 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 Donnelley Financial Solutions, Inc. (NYSE:DFIN).
Is Donnelley Financial Solutions, Inc. (NYSE:DFIN) a buy right now? Money managers are buying. The number of long hedge fund positions advanced by 1 in recent months. Our calculations also showed that DFIN 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.
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_365194" align="alignnone" width="600"] David E. Shaw of D.E. Shaw[/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. Let's take a look at the fresh hedge fund action surrounding Donnelley Financial Solutions, Inc. (NYSE:DFIN).
How have hedgies been trading Donnelley Financial Solutions, Inc. (NYSE:DFIN)?
At Q3's end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in DFIN over the last 17 quarters. 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 Donnelley Financial Solutions, Inc. (NYSE:DFIN) was held by Simcoe Capital Management, which reported holding $37.2 million worth of stock at the end of September. It was followed by D E Shaw with a $6.3 million position. Other investors bullish on the company included Marshall Wace, Fondren Management, and Royce & Associates. In terms of the portfolio weights assigned to each position Simcoe Capital Management allocated the biggest weight to Donnelley Financial Solutions, Inc. (NYSE:DFIN), around 9.55% of its 13F portfolio. AlphaOne Capital Partners is also relatively very bullish on the stock, designating 0.9 percent of its 13F equity portfolio to DFIN.
As industrywide interest jumped, key money managers have jumped into Donnelley Financial Solutions, Inc. (NYSE:DFIN) headfirst. Winton Capital Management, managed by David Harding, established the most valuable position in Donnelley Financial Solutions, Inc. (NYSE:DFIN). Winton Capital Management had $0.5 million invested in the company at the end of the quarter.
Let's now review hedge fund activity in other stocks similar to Donnelley Financial Solutions, Inc. (NYSE:DFIN). These stocks are Jianpu Technology Inc. (NYSE:JT), PennantPark Investment Corp. (NASDAQ:PNNT), Donegal Group Inc (NASDAQ:DGICA), and Puma Biotechnology Inc (NYSE:PBYI). This group of stocks' market valuations are similar to DFIN's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JT,5,24532,1 PNNT,10,18868,1 DGICA,6,10730,2 PBYI,17,120368,0 Average,9.5,43625,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.5 hedge funds with bullish positions and the average amount invested in these stocks was $44 million. That figure was $49 million in DFIN's case. Puma Biotechnology Inc (NYSE:PBYI) is the most popular stock in this table. On the other hand Jianpu Technology Inc. (NYSE:JT) is the least popular one with only 5 bullish hedge fund positions. Donnelley Financial Solutions, Inc. (NYSE:DFIN) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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 DFIN wasn't nearly as popular as these 20 stocks and hedge funds that were betting on DFIN were disappointed as the stock returned -18.5% during the fourth quarter (through the end of November) 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 so far this year.
Disclosure: None. This article was originally published at Insider Monkey.