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 the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns 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 Sun Communities Inc (NYSE:SUI).
Sun Communities Inc (NYSE:SUI) has seen a decrease in support from the world's most elite money managers recently. Our calculations also showed that SUI isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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 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]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let's go over the recent hedge fund action regarding Sun Communities Inc (NYSE:SUI).
How are hedge funds trading Sun Communities Inc (NYSE:SUI)?
At Q3's end, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of -25% from one quarter earlier. On the other hand, there were a total of 23 hedge funds with a bullish position in SUI a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Ken Griffin's Citadel Investment Group has the largest position in Sun Communities Inc (NYSE:SUI), worth close to $100.9 million, comprising less than 0.1%% of its total 13F portfolio. Sitting at the No. 2 spot is Renaissance Technologies which holds a $70.7 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other members of the smart money that are bullish contain Brad Dunkley and Blair Levinsky's Waratah Capital Advisors, Greg Poole's Echo Street Capital Management and Israel Englander's Millennium Management. In terms of the portfolio weights assigned to each position Waratah Capital Advisors allocated the biggest weight to Sun Communities Inc (NYSE:SUI), around 3.97% of its 13F portfolio. Waterfront Capital Partners is also relatively very bullish on the stock, dishing out 2.17 percent of its 13F equity portfolio to SUI.
Because Sun Communities Inc (NYSE:SUI) has experienced bearish sentiment from the aggregate hedge fund industry, it's easy to see that there exists a select few funds that decided to sell off their positions entirely in the third quarter. It's worth mentioning that Jeffrey Talpins's Element Capital Management cut the biggest stake of the "upper crust" of funds tracked by Insider Monkey, worth close to $32.2 million in stock, and David E. Shaw's D E Shaw was right behind this move, as the fund sold off about $6 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 5 funds in the third quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Sun Communities Inc (NYSE:SUI) but similarly valued. These stocks are Atmos Energy Corporation (NYSE:ATO), Cna Financial Corporation (NYSE:CNA), The Liberty SiriusXM Group (NASDAQ:LSXMK), and Kansas City Southern (NYSE:KSU). This group of stocks' market valuations match SUI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ATO,19,407896,5 CNA,14,86638,2 LSXMK,44,2852514,2 KSU,28,550900,2 Average,26.25,974487,2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.25 hedge funds with bullish positions and the average amount invested in these stocks was $974 million. That figure was $303 million in SUI's case. The Liberty SiriusXM Group (NASDAQ:LSXMK) is the most popular stock in this table. On the other hand Cna Financial Corporation (NYSE:CNA) is the least popular one with only 14 bullish hedge fund positions. Sun Communities Inc (NYSE:SUI) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on SUI as the stock returned 11% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.