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 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-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' 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 Xencor Inc (NASDAQ:XNCR).
Is Xencor Inc (NASDAQ:XNCR) a marvelous investment today? Investors who are in the know are taking a pessimistic view. The number of long hedge fund positions went down by 4 lately. Our calculations also showed that XNCR isn't among the 30 most popular stocks among hedge funds (view 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.
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. We're going to take a glance at the recent hedge fund action encompassing Xencor Inc (NASDAQ:XNCR).
What have hedge funds been doing with Xencor Inc (NASDAQ:XNCR)?
Heading into the third quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from the previous quarter. The graph below displays the number of hedge funds with bullish position in XNCR over the last 16 quarters. With hedgies' capital changing hands, there exists an "upper tier" of key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
The largest stake in Xencor Inc (NASDAQ:XNCR) was held by EcoR1 Capital, which reported holding $95.6 million worth of stock at the end of March. It was followed by Millennium Management with a $67.7 million position. Other investors bullish on the company included Redmile Group, Baker Bros. Advisors, and Marshall Wace LLP.
Judging by the fact that Xencor Inc (NASDAQ:XNCR) has faced declining sentiment from the smart money, it's safe to say that there was a specific group of hedge funds that elected to cut their full holdings by the end of the second quarter. At the top of the heap, Steve Cohen's Point72 Asset Management cut the biggest stake of the 750 funds followed by Insider Monkey, worth close to $10.6 million in stock. John Overdeck and David Siegel's fund, Two Sigma Advisors, also dumped its stock, about $0.4 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 4 funds by the end of the second quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Xencor Inc (NASDAQ:XNCR) but similarly valued. These stocks are Hillenbrand, Inc. (NYSE:HI), YETI Holdings, Inc. (NYSE:YETI), Guangshen Railway Company Limited (NYSE:GSH), and PROS Holdings, Inc. (NYSE:PRO). All of these stocks' market caps match XNCR's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HI,18,57614,-2 YETI,12,65998,-2 GSH,1,3864,0 PRO,16,223208,-3 Average,11.75,87671,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.75 hedge funds with bullish positions and the average amount invested in these stocks was $88 million. That figure was $269 million in XNCR's case. Hillenbrand, Inc. (NYSE:HI) is the most popular stock in this table. On the other hand Guangshen Railway Company Limited (NYSE:GSH) is the least popular one with only 1 bullish hedge fund positions. Xencor Inc (NASDAQ:XNCR) 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 XNCR wasn't nearly as popular as these 20 stocks and hedge funds that were betting on XNCR were disappointed as the stock returned -17.6% 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.