Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds' moves.
Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) has seen a decrease in hedge fund interest of late. VNDA was in 18 hedge funds' portfolios at the end of the second quarter of 2019. There were 19 hedge funds in our database with VNDA positions at the end of the previous quarter. Our calculations also showed that VNDA 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.
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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_758402" align="aligncenter" width="450"] William Leland Edwards of Palo Alto Investors[/caption]
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 recent hedge fund action surrounding Vanda Pharmaceuticals Inc. (NASDAQ:VNDA).
What have hedge funds been doing with Vanda Pharmaceuticals Inc. (NASDAQ:VNDA)?
At the end of the second quarter, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards VNDA over the last 16 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
More specifically, Palo Alto Investors was the largest shareholder of Vanda Pharmaceuticals Inc. (NASDAQ:VNDA), with a stake worth $71.2 million reported as of the end of March. Trailing Palo Alto Investors was Consonance Capital Management, which amassed a stake valued at $51.1 million. Armistice Capital, Renaissance Technologies, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.
Due to the fact that Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) has witnessed a decline in interest from the entirety of the hedge funds we track, it's easy to see that there was a specific group of fund managers who sold off their positions entirely last quarter. It's worth mentioning that David Brown's Hawk Ridge Management dumped the largest position of the "upper crust" of funds tracked by Insider Monkey, worth about $3.7 million in stock, and David Costen Haley's HBK Investments was right behind this move, as the fund sold off about $2.7 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 1 funds last quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) but similarly valued. These stocks are Cerus Corporation (NASDAQ:CERS), Mr. Cooper Group Inc. (NASDAQ:COOP), Falcon Minerals Corporation (NASDAQ:FLMN), and P.H. Glatfelter Company (NYSE:GLT). All of these stocks' market caps are similar to VNDA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CERS,13,98617,-4 COOP,23,237258,-4 FLMN,22,119468,5 GLT,6,16606,-4 Average,16,117987,-1.75 [/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 $118 million. That figure was $226 million in VNDA's case. Mr. Cooper Group Inc. (NASDAQ:COOP) is the most popular stock in this table. On the other hand P.H. Glatfelter Company (NYSE:GLT) is the least popular one with only 6 bullish hedge fund positions. Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately VNDA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on VNDA were disappointed as the stock returned -5.7% during the third 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.