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 Fanhua Inc. (NASDAQ:FANH).
Fanhua Inc. (NASDAQ:FANH) was in 9 hedge funds' portfolios at the end of June. FANH shareholders have witnessed a decrease in hedge fund interest recently. There were 10 hedge funds in our database with FANH positions at the end of the previous quarter. Our calculations also showed that FANH 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.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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.
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 check out the latest hedge fund action encompassing Fanhua Inc. (NASDAQ:FANH).
What does smart money think about Fanhua Inc. (NASDAQ:FANH)?
Heading into the third quarter of 2019, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the first quarter of 2019. By comparison, 5 hedge funds held shares or bullish call options in FANH a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
Among these funds, Arrowstreet Capital held the most valuable stake in Fanhua Inc. (NASDAQ:FANH), which was worth $8.9 million at the end of the second quarter. On the second spot was D E Shaw which amassed $7.5 million worth of shares. Moreover, PEAK6 Capital Management, Citadel Investment Group, and Renaissance Technologies were also bullish on Fanhua Inc. (NASDAQ:FANH), allocating a large percentage of their portfolios to this stock.
Seeing as Fanhua Inc. (NASDAQ:FANH) has faced falling interest from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of hedge funds that slashed their positions entirely last quarter. It's worth mentioning that Israel Englander's Millennium Management dumped the largest investment of all the hedgies watched by Insider Monkey, valued at an estimated $3.5 million in stock. Matthew Tewksbury's fund, Stevens Capital Management, also dropped its stock, about $0.4 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 1 funds last quarter.
Let's now take a look at hedge fund activity in other stocks similar to Fanhua Inc. (NASDAQ:FANH). These stocks are Lexington Realty Trust (NYSE:LXP), Arco Platform Limited (NASDAQ:ARCE), Adient plc (NYSE:ADNT), and LCI Industries (NYSE:LCII). This group of stocks' market valuations are closest to FANH's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LXP,12,96708,-6 ARCE,9,49379,-2 ADNT,18,570678,-5 LCII,10,77218,2 Average,12.25,198496,-2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $198 million. That figure was $29 million in FANH's case. Adient plc (NYSE:ADNT) is the most popular stock in this table. On the other hand Arco Platform Limited (NASDAQ:ARCE) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Fanhua Inc. (NASDAQ:FANH) is even less popular than ARCE. Hedge funds dodged a bullet by taking a bearish stance towards FANH. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately FANH wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); FANH investors were disappointed as the stock returned -19.6% 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 so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.