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 ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 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 Renewable Energy Group Inc (NASDAQ:REGI).
Renewable Energy Group Inc (NASDAQ:REGI) shareholders have witnessed a decrease in hedge fund sentiment lately. Our calculations also showed that REGI isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
[caption id="attachment_258236" align="alignnone" width="600"] Ken Griffin of Citadel Investment Group[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. Let's review the recent hedge fund action regarding Renewable Energy Group Inc (NASDAQ:REGI).
What does smart money think about Renewable Energy Group Inc (NASDAQ:REGI)?
Heading into the fourth quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from the second quarter of 2019. By comparison, 21 hedge funds held shares or bullish call options in REGI a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Renewable Energy Group Inc (NASDAQ:REGI) was held by Rubric Capital Management, which reported holding $30 million worth of stock at the end of September. It was followed by Arosa Capital Management with a $25.4 million position. Other investors bullish on the company included Citadel Investment Group, Point72 Asset Management, and Lansdowne Partners. In terms of the portfolio weights assigned to each position Arosa Capital Management allocated the biggest weight to Renewable Energy Group Inc (NASDAQ:REGI), around 4.52% of its 13F portfolio. Rubric Capital Management is also relatively very bullish on the stock, dishing out 2.75 percent of its 13F equity portfolio to REGI.
Because Renewable Energy Group Inc (NASDAQ:REGI) has experienced a decline in interest from the entirety of the hedge funds we track, we can see that there was a specific group of fund managers that elected to cut their full holdings last quarter. Intriguingly, Noam Gottesman's GLG Partners dropped the biggest investment of the "upper crust" of funds monitored by Insider Monkey, comprising about $7 million in stock. Peter Rathjens, Bruce Clarke and John Campbell's fund, Arrowstreet Capital, also sold off its stock, about $5.4 million worth. These moves are interesting, as total hedge fund interest was cut by 1 funds last quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Renewable Energy Group Inc (NASDAQ:REGI) but similarly valued. We will take a look at Hersha Hospitality Trust (NYSE:HT), CorePoint Lodging Inc. (NYSE:CPLG), MeiraGTx Holdings plc (NASDAQ:MGTX), and National Energy Services Reunited Corp. (NASDAQ:NESR). This group of stocks' market values resemble REGI's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HT,13,17504,1 CPLG,10,32667,2 MGTX,13,191351,4 NESR,9,24826,2 Average,11.25,66587,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $67 million. That figure was $89 million in REGI's case. Hersha Hospitality Trust (NYSE:HT) is the most popular stock in this table. On the other hand National Energy Services Reunited Corp. (NASDAQ:NESR) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Renewable Energy Group Inc (NASDAQ:REGI) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on REGI as the stock returned 13.7% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.