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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 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-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' 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 Preferred Apartment Communities Inc. (NYSE:APTS).
Hedge fund interest in Preferred Apartment Communities Inc. (NYSE:APTS) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Tucows Inc. (NASDAQ:TCX), Front Yard Residential Corporation (NYSE:RESI), and Akorn, Inc. (NASDAQ:AKRX) to gather more data points. Our calculations also showed that APTS 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' 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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
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 view the recent hedge fund action encompassing Preferred Apartment Communities Inc. (NYSE:APTS).
Hedge fund activity in Preferred Apartment Communities Inc. (NYSE:APTS)
At the end of the second quarter, a total of 7 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. By comparison, 4 hedge funds held shares or bullish call options in APTS a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, John Overdeck and David Siegel's Two Sigma Advisors has the largest position in Preferred Apartment Communities Inc. (NYSE:APTS), worth close to $2.8 million, accounting for less than 0.1%% of its total 13F portfolio. The second most bullish fund is Renaissance Technologies, with a $1.5 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Some other hedge funds and institutional investors that hold long positions include Ken Griffin's Citadel Investment Group, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital and Israel Englander's Millennium Management.
Due to the fact that Preferred Apartment Communities Inc. (NYSE:APTS) has experienced a decline in interest from the smart money, logic holds that there is a sect of hedge funds who were dropping their full holdings heading into Q3. It's worth mentioning that David Costen Haley's HBK Investments dumped the biggest position of the "upper crust" of funds watched by Insider Monkey, totaling close to $0.3 million in stock, and Bruce Kovner's Caxton Associates LP was right behind this move, as the fund dumped about $0.3 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks similar to Preferred Apartment Communities Inc. (NYSE:APTS). We will take a look at Tucows Inc. (NASDAQ:TCX), Front Yard Residential Corporation (NYSE:RESI), Akorn, Inc. (NASDAQ:AKRX), and Winmark Corporation (NASDAQ:WINA). All of these stocks' market caps are closest to APTS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TCX,8,49968,-2 RESI,11,43581,-6 AKRX,14,116153,-2 WINA,6,92656,-1 Average,9.75,75590,-2.75 [/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 $76 million. That figure was $7 million in APTS's case. Akorn, Inc. (NASDAQ:AKRX) is the most popular stock in this table. On the other hand Winmark Corporation (NASDAQ:WINA) is the least popular one with only 6 bullish hedge fund positions. Preferred Apartment Communities Inc. (NYSE:APTS) 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 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. Unfortunately APTS wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); APTS investors were disappointed as the stock returned -1.6% during the third quarter 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.
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