Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example in the first 2.5 months of this year the Standard and Poor’s 500 Index returned approximately 13.1% (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only 5% due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns (5%) versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like Upland Software Inc (NASDAQ:UPLD).
Upland Software Inc (NASDAQ:UPLD) was in 25 hedge funds' portfolios at the end of December. UPLD has experienced an increase in hedge fund sentiment lately. There were 20 hedge funds in our database with UPLD holdings at the end of the previous quarter. Our calculations also showed that upld 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 32 percentage points since May 2014 through March 12, 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.
We're going to review the latest hedge fund action encompassing Upland Software Inc (NASDAQ:UPLD).
How are hedge funds trading Upland Software Inc (NASDAQ:UPLD)?
At Q4's end, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 25% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in UPLD over the last 14 quarters. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
Among these funds, Portolan Capital Management held the most valuable stake in Upland Software Inc (NASDAQ:UPLD), which was worth $19.2 million at the end of the fourth quarter. On the second spot was G2 Investment Partners Management which amassed $13.5 million worth of shares. Moreover, Dorset Management, Ardsley Partners, and Driehaus Capital were also bullish on Upland Software Inc (NASDAQ:UPLD), allocating a large percentage of their portfolios to this stock.
With a general bullishness amongst the heavyweights, specific money managers were leading the bulls' herd. Raging Capital Management, managed by William C. Martin, assembled the largest position in Upland Software Inc (NASDAQ:UPLD). Raging Capital Management had $6.6 million invested in the company at the end of the quarter. Jay Genzer's Thames Capital Management also initiated a $3.4 million position during the quarter. The following funds were also among the new UPLD investors: Paul Hondros's AlphaOne Capital Partners, Chuck Royce's Royce & Associates, and Paul Marshall and Ian Wace's Marshall Wace LLP.
Let's go over hedge fund activity in other stocks similar to Upland Software Inc (NASDAQ:UPLD). These stocks are Johnson Outdoors Inc. (NASDAQ:JOUT), M/I Homes Inc (NYSE:MHO), KNOT Offshore Partners LP (NYSE:KNOP), and Huami Corporation (NYSE:HMI). This group of stocks' market valuations resemble UPLD's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JOUT,12,57312,-1 MHO,12,34578,-2 KNOP,5,7135,1 HMI,4,4362,0 Average,8.25,25847,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.25 hedge funds with bullish positions and the average amount invested in these stocks was $26 million. That figure was $105 million in UPLD's case. Johnson Outdoors Inc. (NASDAQ:JOUT) is the most popular stock in this table. On the other hand Huami Corporation (NYSE:HMI) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Upland Software Inc (NASDAQ:UPLD) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on UPLD as the stock returned 60.3% and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.