Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors' favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the second quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds' top consensus picks. This year hedge funds' top 20 stock picks outperformed the S&P 500 Index by 6.6 percentage points through May 30th. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.
PPDAI Group Inc. (NYSE:PPDF) was in 12 hedge funds' portfolios at the end of March. PPDF investors should be aware of an increase in support from the world's most elite money managers in recent months. There were 6 hedge funds in our database with PPDF holdings at the end of the previous quarter. Our calculations also showed that PPDF isn't among the 30 most popular stocks among hedge funds.
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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
[caption id="attachment_746893" align="aligncenter" width="473"] Paul Marshall of Marshall Wace[/caption]
Let's take a peek at the new hedge fund action surrounding PPDAI Group Inc. (NYSE:PPDF).
What does smart money think about PPDAI Group Inc. (NYSE:PPDF)?
At the end of the first quarter, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 100% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards PPDF over the last 15 quarters. With hedgies' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
The largest stake in PPDAI Group Inc. (NYSE:PPDF) was held by Arrowstreet Capital, which reported holding $3.2 million worth of stock at the end of March. It was followed by Citadel Investment Group with a $1.9 million position. Other investors bullish on the company included Millennium Management, Marshall Wace LLP, and BlueCrest Capital Mgmt..
Consequently, key money managers have been driving this bullishness. BlueCrest Capital Mgmt., managed by Michael Platt and William Reeves, assembled the biggest position in PPDAI Group Inc. (NYSE:PPDF). BlueCrest Capital Mgmt. had $0.3 million invested in the company at the end of the quarter. Paul Tudor Jones's Tudor Investment Corp also initiated a $0.1 million position during the quarter. The following funds were also among the new PPDF investors: John Overdeck and David Siegel's Two Sigma Advisors, Jim Simons's Renaissance Technologies, and Matthew Hulsizer's PEAK6 Capital Management.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as PPDAI Group Inc. (NYSE:PPDF) but similarly valued. We will take a look at Denny's Corporation (NASDAQ:DENN), Orion Engineered Carbons SA (NYSE:OEC), Essential Properties Realty Trust, Inc. (NYSE:EPRT), and Rent-A-Center Inc (NASDAQ:RCII). This group of stocks' market valuations are similar to PPDF's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DENN,19,171859,0 OEC,23,249517,0 EPRT,13,127309,0 RCII,21,302579,2 Average,19,212816,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $213 million. That figure was $8 million in PPDF's case. Orion Engineered Carbons SA (NYSE:OEC) is the most popular stock in this table. On the other hand Essential Properties Realty Trust, Inc. (NYSE:EPRT) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks PPDAI Group Inc. (NYSE:PPDF) is even less popular than EPRT. Hedge funds clearly dropped the ball on PPDF as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on PPDF as the stock returned 18.4% during the same period and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.