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 Nuance Communications Inc. (NASDAQ:NUAN).
Is Nuance Communications Inc. (NASDAQ:NUAN) a bargain? Investors who are in the know are taking a pessimistic view. The number of bullish hedge fund bets decreased by 1 recently. Our calculations also showed that NUAN isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). NUAN was in 27 hedge funds' portfolios at the end of the third quarter of 2019. There were 28 hedge funds in our database with NUAN positions at the end of the previous quarter. 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_26869" align="aligncenter" width="508"] Larry Robbins of Glenview Capital[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to go over the new hedge fund action encompassing Nuance Communications Inc. (NASDAQ:NUAN).
Hedge fund activity in Nuance Communications Inc. (NASDAQ:NUAN)
At the end of the third quarter, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards NUAN over the last 17 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Baupost Group held the most valuable stake in Nuance Communications Inc. (NASDAQ:NUAN), which was worth $134.5 million at the end of the third quarter. On the second spot was Glenview Capital which amassed $128.9 million worth of shares. RGM Capital, Park West Asset Management, and Lynrock Lake were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Lynrock Lake allocated the biggest weight to Nuance Communications Inc. (NASDAQ:NUAN), around 9.74% of its portfolio. RGM Capital is also relatively very bullish on the stock, designating 6.6 percent of its 13F equity portfolio to NUAN.
Seeing as Nuance Communications Inc. (NASDAQ:NUAN) has faced a decline in interest from hedge fund managers, we can see that there were a few money managers that elected to cut their entire stakes by the end of the third quarter. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital cut the biggest investment of the 750 funds followed by Insider Monkey, totaling about $27.3 million in stock. Noam Gottesman's fund, GLG Partners, also sold off its stock, about $4.2 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 1 funds by the end of the third quarter.
Let's also examine hedge fund activity in other stocks similar to Nuance Communications Inc. (NASDAQ:NUAN). We will take a look at Ashland Global Holdings Inc.. (NYSE:ASH), ADT Inc. (NYSE:ADT), Stericycle Inc (NASDAQ:SRCL), and Radian Group Inc (NYSE:RDN). This group of stocks' market caps are similar to NUAN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ASH,30,1196782,-1 ADT,16,161151,-4 SRCL,16,700061,0 RDN,22,178364,0 Average,21,559090,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $559 million. That figure was $741 million in NUAN's case. Ashland Global Holdings Inc.. (NYSE:ASH) is the most popular stock in this table. On the other hand ADT Inc. (NYSE:ADT) is the least popular one with only 16 bullish hedge fund positions. Nuance Communications Inc. (NASDAQ:NUAN) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on NUAN as the stock returned 27% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
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