Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example in the first 2.5 months of this year the Standard and Poor’s 500 Index returned approximately 13.1% (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. Interestingly, an average long/short hedge fund returned only 5% due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns (5%) versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like Prospect Capital Corporation (NASDAQ:PSEC).
Prospect Capital Corporation (NASDAQ:PSEC) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 11 hedge funds' portfolios at the end of December. 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 Brandywine Realty Trust (NYSE:BDN), Colony Capital Inc (NYSE:CLNY), and Viavi Solutions Inc (NASDAQ:VIAV) to gather more data points.
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 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 check out the fresh hedge fund action surrounding Prospect Capital Corporation (NASDAQ:PSEC).
What have hedge funds been doing with Prospect Capital Corporation (NASDAQ:PSEC)?
Heading into the first quarter of 2019, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 12 hedge funds with a bullish position in PSEC a year ago. With the smart money's sentiment swirling, there exists a select group of key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
Among these funds, Arrowstreet Capital held the most valuable stake in Prospect Capital Corporation (NASDAQ:PSEC), which was worth $11.2 million at the end of the fourth quarter. On the second spot was Millennium Management which amassed $5.3 million worth of shares. Moreover, McKinley Capital Management, D E Shaw, and Two Sigma Advisors were also bullish on Prospect Capital Corporation (NASDAQ:PSEC), allocating a large percentage of their portfolios to this stock.
Because Prospect Capital Corporation (NASDAQ:PSEC) has faced bearish sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of funds that decided to sell off their positions entirely heading into Q3. At the top of the heap, Philip Rosenstrach's Pomelo Capital dropped the biggest investment of the "upper crust" of funds monitored by Insider Monkey, comprising about $5.7 million in stock, and Paul Tudor Jones's Tudor Investment Corp was right behind this move, as the fund dropped about $0.4 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Prospect Capital Corporation (NASDAQ:PSEC) but similarly valued. These stocks are Brandywine Realty Trust (NYSE:BDN), Colony Capital Inc (NYSE:CLNY), Viavi Solutions Inc (NASDAQ:VIAV), and Cleveland-Cliffs Inc (NYSE:CLF). All of these stocks' market caps match PSEC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BDN,17,105044,2 CLNY,26,334123,1 VIAV,26,175280,4 CLF,29,314934,4 Average,24.5,232345,2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $232 million. That figure was $30 million in PSEC's case. Cleveland-Cliffs Inc (NYSE:CLF) is the most popular stock in this table. On the other hand Brandywine Realty Trust (NYSE:BDN) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Prospect Capital Corporation (NASDAQ:PSEC) is even less popular than BDN. Hedge funds dodged a bullet by taking a bearish stance towards PSEC. Our calculations showed that the top 15 most popular hedge fund stocks returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately PSEC wasn't nearly as popular as these 15 stock (hedge fund sentiment was very bearish); PSEC investors were disappointed as the stock returned 8.4% 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.
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