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 5 months of this year through May 30th the Standard and Poor’s 500 Index returned approximately 12.1% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns 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 Virtu Financial Inc (NASDAQ:VIRT).
Virtu Financial Inc (NASDAQ:VIRT) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 17 hedge funds' portfolios at the end of March. 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 Littelfuse, Inc. (NASDAQ:LFUS), Kirby Corporation (NYSE:KEX), and Flowers Foods, Inc. (NYSE:FLO) to gather more data points.
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 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Let's take a peek at the new hedge fund action regarding Virtu Financial Inc (NASDAQ:VIRT).
How are hedge funds trading Virtu Financial Inc (NASDAQ:VIRT)?
At the end of the first quarter, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in VIRT over the last 15 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Chuck Royce's Royce & Associates has the largest position in Virtu Financial Inc (NASDAQ:VIRT), worth close to $34.1 million, amounting to 0.3% of its total 13F portfolio. On Royce & Associates's heels is Strycker View Capital, managed by Usman Waheed, which holds a $15.2 million position; the fund has 6.4% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that are bullish include Israel Englander's Millennium Management, Jim Simons's Renaissance Technologies and Ken Griffin's Citadel Investment Group.
Due to the fact that Virtu Financial Inc (NASDAQ:VIRT) has faced a decline in interest from the aggregate hedge fund industry, logic holds that there is a sect of money managers who sold off their positions entirely last quarter. It's worth mentioning that Dmitry Balyasny's Balyasny Asset Management dropped the largest stake of the 700 funds watched by Insider Monkey, totaling about $9.7 million in stock. Richard Driehaus's fund, Driehaus Capital, also dumped its stock, about $1.9 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks similar to Virtu Financial Inc (NASDAQ:VIRT). These stocks are Littelfuse, Inc. (NASDAQ:LFUS), Kirby Corporation (NYSE:KEX), Flowers Foods, Inc. (NYSE:FLO), and Mattel, Inc. (NASDAQ:MAT). This group of stocks' market values are similar to VIRT's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LFUS,13,248928,-2 KEX,19,514257,3 FLO,18,190309,-2 MAT,21,703901,6 Average,17.75,414349,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $414 million. That figure was $93 million in VIRT's case. Mattel, Inc. (NASDAQ:MAT) is the most popular stock in this table. On the other hand Littelfuse, Inc. (NASDAQ:LFUS) is the least popular one with only 13 bullish hedge fund positions. Virtu Financial Inc (NASDAQ:VIRT) 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately VIRT wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); VIRT investors were disappointed as the stock returned -8% during the same time period 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.