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 Douglas Emmett, Inc. (NYSE:DEI).
Is Douglas Emmett, Inc. (NYSE:DEI) going to take off soon? The smart money is getting more bullish. The number of bullish hedge fund positions increased by 1 in recent months. Our calculations also showed that DEI 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.
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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_189632" align="aligncenter" width="450"] David Harding of Winton Capital Management[/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. Let's review the new hedge fund action surrounding Douglas Emmett, Inc. (NYSE:DEI).
What does smart money think about Douglas Emmett, Inc. (NYSE:DEI)?
At the end of the third quarter, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from the previous quarter. On the other hand, there were a total of 14 hedge funds with a bullish position in DEI a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Zimmer Partners held the most valuable stake in Douglas Emmett, Inc. (NYSE:DEI), which was worth $273.7 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $207.4 million worth of shares. Winton Capital Management, Millennium Management, and Citadel Investment Group 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 Zimmer Partners allocated the biggest weight to Douglas Emmett, Inc. (NYSE:DEI), around 2.98% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, designating 0.44 percent of its 13F equity portfolio to DEI.
As industrywide interest jumped, specific money managers were breaking ground themselves. Laurion Capital Management, managed by Benjamin A. Smith, initiated the most outsized position in Douglas Emmett, Inc. (NYSE:DEI). Laurion Capital Management had $1.4 million invested in the company at the end of the quarter. Richard Driehaus's Driehaus Capital also initiated a $0.7 million position during the quarter. The following funds were also among the new DEI investors: Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital and Matthew Hulsizer's PEAK6 Capital Management.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Douglas Emmett, Inc. (NYSE:DEI) but similarly valued. These stocks are Teva Pharmaceutical Industries Limited (NYSE:TEVA), Huaneng Power International Inc (NYSE:HNP), AerCap Holdings N.V. (NYSE:AER), and Levi Strauss & Co. (NYSE:LEVI). This group of stocks' market valuations resemble DEI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TEVA,23,660560,-2 HNP,3,2567,0 AER,28,1220299,1 LEVI,10,21784,-5 Average,16,476303,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $476 million. That figure was $571 million in DEI's case. AerCap Holdings N.V. (NYSE:AER) is the most popular stock in this table. On the other hand Huaneng Power International Inc (NYSE:HNP) is the least popular one with only 3 bullish hedge fund positions. Douglas Emmett, Inc. (NYSE:DEI) 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 DEI wasn't nearly as popular as these 20 stocks and hedge funds that were betting on DEI were disappointed as the stock returned 2.9% 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.