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The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn't the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds' positions on March 31st, about a week after the S&P 500 Index bottomed. We at Insider Monkey have made an extensive database of more than 821 of those established hedge funds and famous value investors' filings. In this article, we analyze how these elite funds and prominent investors traded Zai Lab Limited (NASDAQ:ZLAB) based on those filings.
Is Zai Lab Limited (NASDAQ:ZLAB) a great investment today? The best stock pickers are selling. The number of bullish hedge fund bets decreased by 4 lately. Our calculations also showed that ZLAB isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). ZLAB was in 22 hedge funds' portfolios at the end of March. There were 26 hedge funds in our database with ZLAB holdings at the end of the previous quarter.
Video: 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 S&P 500 ETFs by 58 percentage points since March 2017 (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.
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Kris Jenner of Rock Springs Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like these. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let's go over the recent hedge fund action surrounding Zai Lab Limited (NASDAQ:ZLAB).
What does smart money think about Zai Lab Limited (NASDAQ:ZLAB)?
Heading into the second quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in ZLAB over the last 18 quarters. With hedgies' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
The largest stake in Zai Lab Limited (NASDAQ:ZLAB) was held by Segantii Capital, which reported holding $93.5 million worth of stock at the end of September. It was followed by Indus Capital with a $41 million position. Other investors bullish on the company included Rock Springs Capital Management, Hillhouse Capital Management, and Millennium Management. In terms of the portfolio weights assigned to each position Prince Street Capital Management allocated the biggest weight to Zai Lab Limited (NASDAQ:ZLAB), around 9.9% of its 13F portfolio. Segantii Capital is also relatively very bullish on the stock, earmarking 7.46 percent of its 13F equity portfolio to ZLAB.
Because Zai Lab Limited (NASDAQ:ZLAB) has faced declining sentiment from the aggregate hedge fund industry, logic holds that there exists a select few hedgies that decided to sell off their entire stakes heading into Q4. Intriguingly, Michael Gelband's ExodusPoint Capital cut the largest position of the "upper crust" of funds watched by Insider Monkey, worth about $9.9 million in stock. Ken Griffin's fund, Citadel Investment Group, also cut its stock, about $2.7 million worth. These moves are interesting, as total hedge fund interest dropped by 4 funds heading into Q4.
Let's go over hedge fund activity in other stocks similar to Zai Lab Limited (NASDAQ:ZLAB). We will take a look at Cullen/Frost Bankers, Inc. (NYSE:CFR), First Citizens BancShares Inc. (NASDAQ:FCNCA), The Hanover Insurance Group, Inc. (NYSE:THG), and Switch, Inc. (NYSE:SWCH). This group of stocks' market caps match ZLAB's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CFR,18,40108,0 FCNCA,17,129488,-6 THG,24,134965,3 SWCH,24,394487,6 Average,20.75,174762,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $175 million. That figure was $365 million in ZLAB's case. The Hanover Insurance Group, Inc. (NYSE:THG) is the most popular stock in this table. On the other hand First Citizens BancShares Inc. (NASDAQ:FCNCA) is the least popular one with only 17 bullish hedge fund positions. Zai Lab Limited (NASDAQ:ZLAB) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.9% in 2020 through June 10th but still beat the market by 14.2 percentage points. Hedge funds were also right about betting on ZLAB as the stock returned 41.1% in Q2 (through June 10th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.