Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like Mizuho Financial Group Inc. (NYSE:MFG).
Mizuho Financial Group Inc. (NYSE:MFG) has experienced a decrease in hedge fund sentiment recently. Our calculations also showed that MFG 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.
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 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 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 stocks that are in our short portfolio.
[caption id="attachment_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now let's take a look at the new hedge fund action surrounding Mizuho Financial Group Inc. (NYSE:MFG).
Hedge fund activity in Mizuho Financial Group Inc. (NYSE:MFG)
At Q3's end, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -33% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in MFG over the last 17 quarters. With hedgies' sentiment swirling, there exists a few noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies, holds the biggest position in Mizuho Financial Group Inc. (NYSE:MFG). Renaissance Technologies has a $13.1 million position in the stock, comprising less than 0.1%% of its 13F portfolio. Sitting at the No. 2 spot is D E Shaw, managed by David E. Shaw, which holds a $1 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Some other professional money managers that hold long positions encompass Israel Englander's Millennium Management, Ken Griffin's Citadel Investment Group and . In terms of the portfolio weights assigned to each position Renaissance Technologies allocated the biggest weight to Mizuho Financial Group Inc. (NYSE:MFG), around 0.01% of its 13F portfolio. D E Shaw is also relatively very bullish on the stock, setting aside 0.0012 percent of its 13F equity portfolio to MFG.
Since Mizuho Financial Group Inc. (NYSE:MFG) has witnessed falling interest from the entirety of the hedge funds we track, we can see that there is a sect of hedge funds that elected to cut their full holdings in the third quarter. At the top of the heap, Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners cut the largest position of all the hedgies tracked by Insider Monkey, totaling close to $8.5 million in stock. Paul Marshall and Ian Wace's fund, Marshall Wace, also cut its stock, about $0 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 2 funds in the third quarter.
Let's check out hedge fund activity in other stocks similar to Mizuho Financial Group Inc. (NYSE:MFG). These stocks are Workday Inc (NYSE:WDAY), Moody's Corporation (NYSE:MCO), AFLAC Incorporated (NYSE:AFL), and Travelers Companies Inc (NYSE:TRV). All of these stocks' market caps are closest to MFG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WDAY,39,1240146,-2 MCO,48,7835478,9 AFL,27,528066,4 TRV,34,1514479,8 Average,37,2779542,4.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 37 hedge funds with bullish positions and the average amount invested in these stocks was $2780 million. That figure was $14 million in MFG's case. Moody's Corporation (NYSE:MCO) is the most popular stock in this table. On the other hand AFLAC Incorporated (NYSE:AFL) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Mizuho Financial Group Inc. (NYSE:MFG) is even less popular than AFL. Hedge funds dodged a bullet by taking a bearish stance towards MFG. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MFG wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); MFG investors were disappointed as the stock returned 1.6% 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.