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 the Standard and Poor’s 500 Total Return Index returned approximately 26% (including dividend payments) through November 22nd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 35% during the same 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 Quarterhill Inc. (NASDAQ:QTRH).
Hedge fund interest in Quarterhill Inc. (NASDAQ:QTRH) 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 Neuronetics, Inc. (NASDAQ:STIM), FIRST FINANCIAL NORTHWEST, INC. (NASDAQ:FFNW), and Ramaco Resources, Inc. (NASDAQ:METC) to gather more data points. Our calculations also showed that QTRH isn't among the 30 most popular stocks among hedge funds.
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_255018" align="aligncenter" width="450"] Prem Watsa of Fairfax Financial Holdings[/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. Let's take a look at the key hedge fund action regarding Quarterhill Inc. (NASDAQ:QTRH).
How are hedge funds trading Quarterhill Inc. (NASDAQ:QTRH)?
At Q3's end, a total of 3 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in QTRH over the last 17 quarters. With the smart money's capital changing hands, there exists a few noteworthy hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
The largest stake in Quarterhill Inc. (NASDAQ:QTRH) was held by Renaissance Technologies, which reported holding $2.7 million worth of stock at the end of September. It was followed by Fairfax Financial Holdings with a $1 million position. The only other hedge fund that is bullish on the company was Citadel Investment Group.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Arrowstreet Capital. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Citadel Investment Group).
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Quarterhill Inc. (NASDAQ:QTRH) but similarly valued. We will take a look at Neuronetics, Inc. (NASDAQ:STIM), FIRST FINANCIAL NORTHWEST, INC. (NASDAQ:FFNW), Ramaco Resources, Inc. (NASDAQ:METC), and Middlefield Banc Corp. (NASDAQ:MBCN). This group of stocks' market valuations are similar to QTRH's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STIM,6,4361,1 FFNW,1,9976,-1 METC,7,3455,1 MBCN,4,14858,1 Average,4.5,8163,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.5 hedge funds with bullish positions and the average amount invested in these stocks was $8 million. That figure was $4 million in QTRH's case. Ramaco Resources, Inc. (NASDAQ:METC) is the most popular stock in this table. On the other hand FIRST FINANCIAL NORTHWEST, INC. (NASDAQ:FFNW) is the least popular one with only 1 bullish hedge fund positions. Quarterhill Inc. (NASDAQ:QTRH) 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 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately QTRH wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); QTRH investors were disappointed as the stock returned 0% during the fourth quarter (through 11/22) 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.