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 ETFs returned 27.5% through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% 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 Azure Power Global Limited (NYSE:AZRE).
Azure Power Global Limited (NYSE:AZRE) was in 4 hedge funds' portfolios at the end of September. AZRE shareholders have witnessed a decrease in support from the world's most elite money managers lately. There were 6 hedge funds in our database with AZRE holdings at the end of the previous quarter. Our calculations also showed that AZRE 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.
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' 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.
[caption id="attachment_26575" align="aligncenter" width="471"] Louis Bacon Moore of Moore Capital[/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 as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now we're going to check out the recent hedge fund action regarding Azure Power Global Limited (NYSE:AZRE).
What does smart money think about Azure Power Global Limited (NYSE:AZRE)?
Heading into the fourth quarter of 2019, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -33% from the second quarter of 2019. By comparison, 3 hedge funds held shares or bullish call options in AZRE a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Israel Englander's Millennium Management has the number one position in Azure Power Global Limited (NYSE:AZRE), worth close to $3.9 million, accounting for less than 0.1%% of its total 13F portfolio. On Millennium Management's heels is Renaissance Technologies, with a $2.1 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Other hedge funds and institutional investors with similar optimism encompass Louis Bacon's Moore Global Investments, Philip Hempleman's Ardsley Partners and . In terms of the portfolio weights assigned to each position Ardsley Partners allocated the biggest weight to Azure Power Global Limited (NYSE:AZRE), around 0.12% of its 13F portfolio. Moore Global Investments is also relatively very bullish on the stock, dishing out 0.04 percent of its 13F equity portfolio to AZRE.
Seeing as Azure Power Global Limited (NYSE:AZRE) has faced bearish sentiment from hedge fund managers, it's easy to see that there is a sect of hedgies who were dropping their positions entirely in the third quarter. At the top of the heap, Perella Weinberg Partners dropped the largest investment of all the hedgies followed by Insider Monkey, worth close to $3 million in stock. Gregory Fraser, Rudolph Kluiber, and Timothy Krochuk's fund, GRT Capital Partners, also sold off its stock, about $0.1 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 2 funds in the third quarter.
Let's now review hedge fund activity in other stocks similar to Azure Power Global Limited (NYSE:AZRE). We will take a look at Sterling Bancorp, Inc. (Southfield, MI) (NASDAQ:SBT), Old Line Bancshares, Inc. (NASDAQ:OLBK), Amyris Inc (NASDAQ:AMRS), and The Hackett Group, Inc. (NASDAQ:HCKT). This group of stocks' market caps are closest to AZRE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SBT,5,7732,-1 OLBK,11,50236,6 AMRS,7,38037,-2 HCKT,16,72533,1 Average,9.75,42135,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.75 hedge funds with bullish positions and the average amount invested in these stocks was $42 million. That figure was $8 million in AZRE's case. The Hackett Group, Inc. (NASDAQ:HCKT) is the most popular stock in this table. On the other hand Sterling Bancorp, Inc. (Southfield, MI) (NASDAQ:SBT) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Azure Power Global Limited (NYSE:AZRE) is even less popular than SBT. 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 AZRE, though not to the same extent, as the stock returned 8.8% during the fourth quarter (through 11/30) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.