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 Index returned approximately 20% in the first 9 months of this year (through September 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-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 Ellington Financial Inc. (NYSE:EFC).
Is Ellington Financial Inc. (NYSE:EFC) a safe investment right now? Money managers are reducing their bets on the stock. The number of long hedge fund positions were cut by 1 lately. Our calculations also showed that EFC isn't among the 30 most popular stocks among hedge funds (see the 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' 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.
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 go over the fresh hedge fund action regarding Ellington Financial Inc. (NYSE:EFC).
How are hedge funds trading Ellington Financial Inc. (NYSE:EFC)?
Heading into the third quarter of 2019, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from one quarter earlier. By comparison, 3 hedge funds held shares or bullish call options in EFC a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
The largest stake in Ellington Financial Inc. (NYSE:EFC) was held by Ellington, which reported holding $18.5 million worth of stock at the end of March. It was followed by Omega Advisors with a $15.5 million position. Other investors bullish on the company included Marshall Wace LLP, Renaissance Technologies, and Millennium Management.
Due to the fact that Ellington Financial Inc. (NYSE:EFC) has witnessed a decline in interest from the smart money, it's easy to see that there is a sect of fund managers that slashed their entire stakes last quarter. At the top of the heap, Jeffrey Hinkle's Shoals Capital Management cut the largest investment of the "upper crust" of funds monitored by Insider Monkey, totaling about $4.9 million in stock. Ken Griffin's fund, Citadel Investment Group, also cut its stock, about $0.2 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 1 funds last quarter.
Let's also examine hedge fund activity in other stocks similar to Ellington Financial Inc. (NYSE:EFC). These stocks are FRP Holdings Inc (NASDAQ:FRPH), EZCORP Inc (NASDAQ:EZPW), Infinera Corporation (NASDAQ:INFN), and Puxin Limited (NYSE:NEW). All of these stocks' market caps match EFC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FRPH,7,46456,-1 EZPW,21,121607,1 INFN,11,89333,-8 NEW,3,4686,1 Average,10.5,65521,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.5 hedge funds with bullish positions and the average amount invested in these stocks was $66 million. That figure was $48 million in EFC's case. EZCORP Inc (NASDAQ:EZPW) is the most popular stock in this table. On the other hand Puxin Limited (NYSE:NEW) is the least popular one with only 3 bullish hedge fund positions. Ellington Financial Inc. (NYSE:EFC) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on EFC, though not to the same extent, as the stock returned 3% during the third quarter and outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.