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 PVH Corp (NYSE:PVH).
Is PVH Corp (NYSE:PVH) worth your attention right now? The smart money is getting less optimistic. The number of bullish hedge fund positions fell by 5 in recent months. Our calculations also showed that PVH isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). PVH was in 27 hedge funds' portfolios at the end of the third quarter of 2019. There were 32 hedge funds in our database with PVH holdings at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.
[caption id="attachment_783421" align="aligncenter" width="473"] Ryan Frick of Dorsal Capital[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a peek at the fresh hedge fund action encompassing PVH Corp (NYSE:PVH).
What have hedge funds been doing with PVH Corp (NYSE:PVH)?
At the end of the third quarter, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -16% from the previous quarter. On the other hand, there were a total of 44 hedge funds with a bullish position in PVH a year ago. With hedge funds' sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Pzena Investment Management, managed by Richard S. Pzena, holds the number one position in PVH Corp (NYSE:PVH). Pzena Investment Management has a $454.3 million position in the stock, comprising 2.5% of its 13F portfolio. The second largest stake is held by Phill Gross and Robert Atchinson of Adage Capital Management, with a $105.1 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Remaining professional money managers that hold long positions include Cliff Asness's AQR Capital Management, David E. Shaw's D E Shaw and Ryan Frick and Oliver Evans's Dorsal Capital Management. In terms of the portfolio weights assigned to each position Dorsal Capital Management allocated the biggest weight to PVH Corp (NYSE:PVH), around 3.74% of its portfolio. Pzena Investment Management is also relatively very bullish on the stock, designating 2.47 percent of its 13F equity portfolio to PVH.
Judging by the fact that PVH Corp (NYSE:PVH) has experienced declining sentiment from the aggregate hedge fund industry, we can see that there lies a certain "tier" of fund managers that decided to sell off their entire stakes last quarter. It's worth mentioning that Israel Englander's Millennium Management sold off the largest position of all the hedgies monitored by Insider Monkey, totaling close to $47.3 million in stock. Gregg Moskowitz's fund, Interval Partners, also dropped its stock, about $32.6 million worth. These transactions are important to note, as total hedge fund interest dropped by 5 funds last quarter.
Let's now review hedge fund activity in other stocks similar to PVH Corp (NYSE:PVH). These stocks are Signature Bank (NASDAQ:SBNY), New Residential Investment Corp (NYSE:NRZ), The Gap Inc. (NYSE:GPS), and The Middleby Corporation (NASDAQ:MIDD). This group of stocks' market values resemble PVH's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SBNY,32,502279,3 NRZ,19,141891,3 GPS,25,148276,4 MIDD,23,348030,-4 Average,24.75,285119,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $285 million. That figure was $1028 million in PVH's case. Signature Bank (NASDAQ:SBNY) is the most popular stock in this table. On the other hand New Residential Investment Corp (NYSE:NRZ) is the least popular one with only 19 bullish hedge fund positions. PVH Corp (NYSE:PVH) is not the most popular stock in this group but hedge fund interest is still above average. 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 PVH, though not to the same extent, as the stock returned 9.9% during the first two months of the fourth quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.