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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 Total Return Index ETFs returned 27.5% through the end of November. 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 Selective Insurance Group, Inc. (NASDAQ:SIGI). Selective mainly offers business, personal, and flood insurance which is why it didn't make our list of the 11 largest auto insurance companies in US in 2019. SIGI is also not a top 10 holding in any of the ETFs in the market. Nevertheless, hedge funds are warming up to the stock.
Selective Insurance Group, Inc. (NASDAQ:SIGI) investors should be aware of an increase in activity from the world's largest hedge funds recently. Our calculations also showed that SIGI 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
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Dmitry Balyasny of Balyasny Asset Managemnet[/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 check out the recent hedge fund action regarding Selective Insurance Group, Inc. (NASDAQ:SIGI).
Hedge fund activity in Selective Insurance Group, Inc. (NASDAQ:SIGI)
At Q3's end, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of 71% from the second quarter of 2019. By comparison, 10 hedge funds held shares or bullish call options in SIGI a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
The largest stake in Selective Insurance Group, Inc. (NASDAQ:SIGI) was held by Millennium Management, which reported holding $32.1 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $21 million position. Other investors bullish on the company included Renaissance Technologies, Balyasny Asset Management, and Prospector Partners. In terms of the portfolio weights assigned to each position Prospector Partners allocated the biggest weight to Selective Insurance Group, Inc. (NASDAQ:SIGI), around 1.4% of its portfolio. Quantinno Capital is also relatively very bullish on the stock, earmarking 0.26 percent of its 13F equity portfolio to SIGI.
Consequently, key money managers were breaking ground themselves. Marshall Wace, managed by Paul Marshall and Ian Wace, assembled the biggest position in Selective Insurance Group, Inc. (NASDAQ:SIGI). Marshall Wace had $4.2 million invested in the company at the end of the quarter. Paul Tudor Jones's Tudor Investment Corp also initiated a $1.4 million position during the quarter. The following funds were also among the new SIGI investors: Michael Gelband's ExodusPoint Capital, David E. Shaw's D E Shaw, and Matthew Tewksbury's Stevens Capital Management.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Selective Insurance Group, Inc. (NASDAQ:SIGI) but similarly valued. These stocks are W.R. Grace & Co. (NYSE:GRA), MGIC Investment Corporation (NYSE:MTG), Blackbaud, Inc. (NASDAQ:BLKB), and J2 Global Inc (NASDAQ:JCOM). All of these stocks' market caps resemble SIGI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GRA,38,1653754,2 MTG,39,566495,4 BLKB,12,72983,2 JCOM,18,280780,-6 Average,26.75,643503,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $644 million. That figure was $120 million in SIGI's case. MGIC Investment Corporation (NYSE:MTG) is the most popular stock in this table. On the other hand Blackbaud, Inc. (NASDAQ:BLKB) is the least popular one with only 12 bullish hedge fund positions. Selective Insurance Group, Inc. (NASDAQ:SIGI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 SIGI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SIGI investors were disappointed as the stock returned -11.6% during the first two months of the fourth quarter 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 in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
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