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 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% 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 Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH).
Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) investors should pay attention to a decrease in activity from the world's largest hedge funds recently. DCPH was in 15 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 16 hedge funds in our database with DCPH positions at the end of the previous quarter. Our calculations also showed that DCPH isn't among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? 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 32 percentage points since May 2014 through March 12, 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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's analyze the fresh hedge fund action surrounding Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH).
How have hedgies been trading Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH)?
At the end of the fourth quarter, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards DCPH over the last 14 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
More specifically, OrbiMed Advisors was the largest shareholder of Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH), with a stake worth $51.3 million reported as of the end of December. Trailing OrbiMed Advisors was Redmile Group, which amassed a stake valued at $34.7 million. Millennium Management, Deerfield Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
Due to the fact that Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) has experienced bearish sentiment from hedge fund managers, we can see that there was a specific group of hedgies who were dropping their entire stakes in the third quarter. It's worth mentioning that Brian Ashford-Russell and Tim Woolley's Polar Capital dropped the biggest stake of the 700 funds tracked by Insider Monkey, valued at about $31.2 million in stock. Andreas Halvorsen's fund, Viking Global, also sold off its stock, about $28.5 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 1 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) but similarly valued. We will take a look at AxoGen, Inc. (NASDAQ:AXGN), Bandwidth Inc. (NASDAQ:BAND), U.S. Silica Holdings Inc (NYSE:SLCA), and Denbury Resources Inc. (NYSE:DNR). This group of stocks' market valuations resemble DCPH's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AXGN,18,103389,-3 BAND,19,103194,3 SLCA,14,177988,-2 DNR,21,50998,0 Average,18,108892,-0.5 [/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 $109 million. That figure was $171 million in DCPH's case. Denbury Resources Inc. (NYSE:DNR) is the most popular stock in this table. On the other hand U.S. Silica Holdings Inc (NYSE:SLCA) is the least popular one with only 14 bullish hedge fund positions. Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately DCPH wasn't nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); DCPH investors were disappointed as the stock returned 15.3% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.