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 returned approximately 26% through November 22nd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 35% 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 SilverCrest Metals Inc. (NYSE:SILV).
SilverCrest Metals Inc. (NYSE:SILV) investors should pay attention to an increase in activity from the world's largest hedge funds of late. SILV was in 3 hedge funds' portfolios at the end of September. There were 2 hedge funds in our database with SILV positions at the end of the previous quarter. Our calculations also showed that SILV 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.
[caption id="attachment_673876" align="aligncenter" width="1613"] John Overdeck of Two Sigma Advisors[/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. Let's take a gander at the recent hedge fund action surrounding SilverCrest Metals Inc. (NYSE:SILV).
What have hedge funds been doing with SilverCrest Metals Inc. (NYSE:SILV)?
Heading into the fourth quarter of 2019, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 50% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SILV over the last 17 quarters. With hedgies' capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
The largest stake in SilverCrest Metals Inc. (NYSE:SILV) was held by Sprott Asset Management, which reported holding $14.2 million worth of stock at the end of September. It was followed by Two Sigma Advisors with a $0.9 million position. The only other hedge fund that is bullish on the company was Millennium Management.
Consequently, specific money managers have jumped into SilverCrest Metals Inc. (NYSE:SILV) headfirst. Two Sigma Advisors, managed by John Overdeck and David Siegel, established the largest position in SilverCrest Metals Inc. (NYSE:SILV). Two Sigma Advisors had $0.9 million invested in the company at the end of the quarter. Israel Englander's Millennium Management also initiated a $0.2 million position during the quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as SilverCrest Metals Inc. (NYSE:SILV) but similarly valued. We will take a look at RISE Education Cayman Ltd (NASDAQ:REDU), Teekay Offshore Partners L.P. (NYSE:TOO), Solid Biosciences Inc. (NASDAQ:SLDB), and Gran Tierra Energy Inc. (NYSEAMEX:GTE). All of these stocks' market caps match SILV's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position REDU,4,5559,-2 TOO,8,2440,2 SLDB,12,171806,2 GTE,13,159882,0 Average,9.25,84922,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $85 million. That figure was $15 million in SILV's case. Gran Tierra Energy Inc. (NYSEAMEX:GTE) is the most popular stock in this table. On the other hand RISE Education Cayman Ltd (NASDAQ:REDU) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks SilverCrest Metals Inc. (NYSE:SILV) is even less popular than REDU. Hedge funds clearly dropped the ball on SILV 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 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. A small number of hedge funds were also right about betting on SILV as the stock returned 9.4% during the fourth quarter (through 11/22) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.