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 Annaly Capital Management, Inc. (NYSE:NLY).
Annaly Capital Management, Inc. (NYSE:NLY) was in 21 hedge funds' portfolios at the end of March. NLY has seen an increase in activity from the world's largest hedge funds lately. There were 16 hedge funds in our database with NLY positions at the end of the previous quarter. Our calculations also showed that NLY isn't among the 30 most popular stocks among hedge funds.
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 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 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 our short portfolio.
We're going to take a look at the new hedge fund action surrounding Annaly Capital Management, Inc. (NYSE:NLY).
What does the smart money think about Annaly Capital Management, Inc. (NYSE:NLY)?
At Q1's end, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 31% from the fourth quarter of 2018. By comparison, 19 hedge funds held shares or bullish call options in NLY a year ago. With the smart money's sentiment swirling, there exists a select group of key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Annaly Capital Management, Inc. (NYSE:NLY), which was worth $171.6 million at the end of the first quarter. On the second spot was Citadel Investment Group which amassed $37.6 million worth of shares. Moreover, Two Sigma Advisors, Balyasny Asset Management, and Adage Capital Management were also bullish on Annaly Capital Management, Inc. (NYSE:NLY), allocating a large percentage of their portfolios to this stock.
As industrywide interest jumped, key hedge funds have jumped into Annaly Capital Management, Inc. (NYSE:NLY) headfirst. Balyasny Asset Management, managed by Dmitry Balyasny, assembled the largest position in Annaly Capital Management, Inc. (NYSE:NLY). Balyasny Asset Management had $21.9 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson's Adage Capital Management also made a $20.5 million investment in the stock during the quarter. The following funds were also among the new NLY investors: Anand Parekh's Alyeska Investment Group, Joseph Samuels's Islet Management, and Richard Driehaus's Driehaus Capital.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Annaly Capital Management, Inc. (NYSE:NLY) but similarly valued. We will take a look at Western Digital Corporation (NASDAQ:WDC), Principal Financial Group Inc (NASDAQ:PFG), Teleflex Incorporated (NYSE:TFX), and Icahn Enterprises LP (NASDAQ:IEP). All of these stocks' market caps are closest to NLY's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WDC,33,387729,8 PFG,15,62018,-3 TFX,19,765454,4 IEP,5,12864139,-1 Average,18,3519835,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $3520 million. That figure was $339 million in NLY's case. Western Digital Corporation (NASDAQ:WDC) is the most popular stock in this table. On the other hand Icahn Enterprises LP (NASDAQ:IEP) is the least popular one with only 5 bullish hedge fund positions. Annaly Capital Management, Inc. (NYSE:NLY) 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately NLY wasn't nearly as popular as these 20 stocks and hedge funds that were betting on NLY were disappointed as the stock returned -10.6% during the same period 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.