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Hedge Funds Sold Tesla Inc. (TSLA) A Bit Too Early

Abigail Fisher

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. 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 Tesla Inc. (NASDAQ:TSLA). There are currently 3 ETFs that allocated at least 11% of their assets to Tesla: ARK Autonomous Technology & Robotics ETF (ARKQ), VanEck Vectors Low Carbon Energy ETF (SMOG), and First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN)

Tesla Inc. (NASDAQ:TSLA) has seen a decrease in hedge fund interest recently. Our calculations also showed that TSLA 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.

5 Most Popular Stocks Among Hedge Funds

According to most market participants, hedge funds are perceived as slow, old investment vehicles of yesteryear. While there are over 8000 funds with their doors open today, We choose to focus on the aristocrats of this group, about 750 funds. It is estimated that this group of investors shepherd bulk of all hedge funds' total asset base, and by watching their matchless investments, Insider Monkey has figured out many investment strategies that have historically outpaced the broader indices. Insider Monkey's flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points annually since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

[caption id="attachment_674067" align="aligncenter" width="473"] Gil Simon of SoMa Equity Partners[/caption]

Gil Simon of SoMa Equity Partners

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. We're going to check out the new hedge fund action encompassing Tesla Inc. (NASDAQ:TSLA).

What have hedge funds been doing with Tesla Inc. (NASDAQ:TSLA)?

At Q3's end, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -24% from the second quarter of 2019. On the other hand, there were a total of 31 hedge funds with a bullish position in TSLA a year ago. With the smart money's sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

TSLA_dec2019

More specifically, Renaissance Technologies was the largest shareholder of Tesla Inc. (NASDAQ:TSLA), with a stake worth $161.6 million reported as of the end of September. Trailing Renaissance Technologies was SoMa Equity Partners, which amassed a stake valued at $77.1 million. Citadel Investment Group, PEAK6 Capital Management, and Point72 Asset Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Albar Capital allocated the biggest weight to Tesla Inc. (NASDAQ:TSLA), around 9.18% of its portfolio. SoMa Equity Partners is also relatively very bullish on the stock, dishing out 5.45 percent of its 13F equity portfolio to TSLA.

Because Tesla Inc. (NASDAQ:TSLA) has faced a decline in interest from the aggregate hedge fund industry, we can see that there exists a select few funds that decided to sell off their full holdings by the end of the third quarter. At the top of the heap, Herb Wagner's FinePoint Capital sold off the largest stake of all the hedgies tracked by Insider Monkey, totaling an estimated $64.2 million in call options. Michel Massoud's fund, Melqart Asset Management, also dropped its call options, about $55.9 million worth. These transactions are important to note, as total hedge fund interest was cut by 9 funds by the end of the third quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Tesla Inc. (NASDAQ:TSLA) but similarly valued. We will take a look at EOG Resources Inc (NYSE:EOG), Biogen Inc. (NASDAQ:BIIB), Public Storage (NYSE:PSA), and Capital One Financial Corp. (NYSE:COF). All of these stocks' market caps are similar to TSLA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EOG,48,1449930,12 BIIB,48,4207480,5 PSA,22,876105,2 COF,42,1936605,0 Average,40,2117530,4.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 40 hedge funds with bullish positions and the average amount invested in these stocks was $2118 million. That figure was $571 million in TSLA's case. EOG Resources Inc (NYSE:EOG) is the most popular stock in this table. On the other hand Public Storage (NYSE:PSA) is the least popular one with only 22 bullish hedge fund positions. Tesla Inc. (NASDAQ:TSLA) 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 TSLA as the stock returned 37% 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.

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