Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won't accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.
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 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 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.
Let's check out the fresh hedge fund action encompassing The Gap Inc. (NYSE:GPS).
How are hedge funds trading The Gap Inc. (NYSE:GPS)?
At Q4's end, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -31% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards GPS over the last 14 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, AQR Capital Management, managed by Cliff Asness, holds the number one position in The Gap Inc. (NYSE:GPS). AQR Capital Management has a $158.8 million position in the stock, comprising 0.2% of its 13F portfolio. Coming in second is Ken Griffin of Citadel Investment Group, with a $14.7 million call position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions include John Tompkins's Tyvor Capital, Noam Gottesman's GLG Partners and Ray Dalio's Bridgewater Associates.
Because The Gap Inc. (NYSE:GPS) has faced falling interest from the smart money, it's easy to see that there were a few hedge funds that decided to sell off their full holdings in the third quarter. Interestingly, Jeffrey Altman's Owl Creek Asset Management sold off the largest investment of the 700 funds monitored by Insider Monkey, totaling close to $22.3 million in stock, and Steven Boyd's Armistice Capital was right behind this move, as the fund sold off about $15.1 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 9 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to The Gap Inc. (NYSE:GPS). We will take a look at F5 Networks, Inc. (NASDAQ:FFIV), Huaneng Power International Inc (NYSE:HNP), Tiffany & Co. (NYSE:TIF), and Tapestry, Inc. (NYSE:TPR). This group of stocks' market caps are closest to GPS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FFIV,24,1091362,0 HNP,3,1184,-1 TIF,30,1225531,-13 TPR,38,579451,5 Average,23.75,724382,-2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $724 million. That figure was $222 million in GPS's case. Tapestry, Inc. (NYSE:TPR) is the most popular stock in this table. On the other hand Huaneng Power International Inc (NYSE:HNP) is the least popular one with only 3 bullish hedge fund positions. The Gap Inc. (NYSE:GPS) 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 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately GPS wasn't in this group. Hedge funds that bet on GPS were disappointed as the stock LOST .9% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.