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 returned approximately 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month 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 Simmons First National Corporation (NASDAQ:SFNC).
Simmons First National Corporation (NASDAQ:SFNC) has experienced an increase in hedge fund interest in recent months. Our calculations also showed that SFNC isn't among the 30 most popular stocks among hedge funds (see the video below). 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 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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a gander at the fresh hedge fund action surrounding Simmons First National Corporation (NASDAQ:SFNC).
What have hedge funds been doing with Simmons First National Corporation (NASDAQ:SFNC)?
At the end of the second quarter, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 33% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SFNC over the last 16 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.
When looking at the institutional investors followed by Insider Monkey, Israel Englander's Millennium Management has the largest position in Simmons First National Corporation (NASDAQ:SFNC), worth close to $10.1 million, accounting for less than 0.1%% of its total 13F portfolio. The second most bullish fund manager is D. E. Shaw of D E Shaw, with a $5 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Other peers with similar optimism encompass Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Noam Gottesman's GLG Partners and Paul Marshall and Ian Wace's Marshall Wace LLP.
As one would reasonably expect, some big names were breaking ground themselves. GLG Partners, managed by Noam Gottesman, initiated the most valuable position in Simmons First National Corporation (NASDAQ:SFNC). GLG Partners had $4.6 million invested in the company at the end of the quarter. Ken Griffin's Citadel Investment Group also initiated a $2.6 million position during the quarter. The following funds were also among the new SFNC investors: Dmitry Balyasny's Balyasny Asset Management and John Overdeck and David Siegel's Two Sigma Advisors.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Simmons First National Corporation (NASDAQ:SFNC) but similarly valued. We will take a look at Urban Outfitters, Inc. (NASDAQ:URBN), Biohaven Pharmaceutical Holding Company Ltd. (NYSE:BHVN), Inovalon Holdings Inc (NASDAQ:INOV), and Lexington Realty Trust (NYSE:LXP). This group of stocks' market values resemble SFNC's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position URBN,21,206534,-4 BHVN,38,493841,5 INOV,7,16571,-2 LXP,12,96708,-6 Average,19.5,203414,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.5 hedge funds with bullish positions and the average amount invested in these stocks was $203 million. That figure was $32 million in SFNC's case. Biohaven Pharmaceutical Holding Company Ltd. (NYSE:BHVN) is the most popular stock in this table. On the other hand Inovalon Holdings Inc (NASDAQ:INOV) is the least popular one with only 7 bullish hedge fund positions. Simmons First National Corporation (NASDAQ:SFNC) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on SFNC as the stock returned 7.7% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
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