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Hedge Funds Have Never Been More Bullish On RLI Corp. (RLI)

Abigail Fisher

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 12.1% in the first 5 months of this year through May 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-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' 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 RLI Corp. (NYSE:RLI).

RLI Corp. (NYSE:RLI) investors should pay attention to an increase in activity from the world's largest hedge funds of late. Our calculations also showed that RLI isn't among the 30 most popular stocks among hedge funds.

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 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Tom Gayner

Let's take a peek at the recent hedge fund action encompassing RLI Corp. (NYSE:RLI).

Hedge fund activity in RLI Corp. (NYSE:RLI)

At Q1's end, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 8% from the fourth quarter of 2018. By comparison, 10 hedge funds held shares or bullish call options in RLI a year ago. With hedge funds' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

RLI_june2019

Among these funds, Markel Gayner Asset Management held the most valuable stake in RLI Corp. (NYSE:RLI), which was worth $85.9 million at the end of the first quarter. On the second spot was Royce & Associates which amassed $22.8 million worth of shares. Moreover, Polar Capital, GLG Partners, and Renaissance Technologies were also bullish on RLI Corp. (NYSE:RLI), allocating a large percentage of their portfolios to this stock.

With a general bullishness amongst the heavyweights, some big names were leading the bulls' herd. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, established the most valuable position in RLI Corp. (NYSE:RLI). Marshall Wace LLP had $1 million invested in the company at the end of the quarter. Brandon Haley's Holocene Advisors also initiated a $0.5 million position during the quarter.

Let's go over hedge fund activity in other stocks similar to RLI Corp. (NYSE:RLI). These stocks are AMC Networks Inc (NASDAQ:AMCX), Generac Holdings Inc. (NYSE:GNRC), Valley National Bancorp (NASDAQ:VLY), and FS KKR Capital Corp. (NYSE:FSK). This group of stocks' market values are closest to RLI's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMCX,20,259491,1 GNRC,17,144727,-4 VLY,11,26971,3 FSK,19,202328,-1 Average,16.75,158379,-0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $158 million. That figure was $141 million in RLI's case. AMC Networks Inc (NASDAQ:AMCX) is the most popular stock in this table. On the other hand Valley National Bancorp (NASDAQ:VLY) is the least popular one with only 11 bullish hedge fund positions. RLI Corp. (NYSE:RLI) 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on RLI as the stock returned 23.3% 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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