It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. The Standard and Poor’s 500 Index returned approximately 5.7% in the 12 months ending October 26 (including dividend payments). Conversely, hedge funds’ 30 preferred S&P 500 stocks (as of June 2018) generated a return of 15.1% during the same 12-month period, with 53% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. 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 HomeStreet Inc (NASDAQ:HMST).
Is HomeStreet Inc (NASDAQ:HMST) an outstanding investment now? The smart money is getting less bullish. The number of long hedge fund positions retreated by 1 recently. Our calculations also showed that HMST isn't among the 30 most popular stocks among hedge funds. HMST was in 6 hedge funds' portfolios at the end of the third quarter of 2018. There were 7 hedge funds in our database with HMST holdings at the end of the previous quarter.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
Let's analyze the latest hedge fund action surrounding HomeStreet Inc (NASDAQ:HMST).
What have hedge funds been doing with HomeStreet Inc (NASDAQ:HMST)?
Heading into the fourth quarter of 2018, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from the previous quarter. On the other hand, there were a total of 8 hedge funds with a bullish position in HMST at the beginning of this year. With hedgies' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
According to Insider Monkey's hedge fund database, Millennium Management, managed by Israel Englander, holds the biggest position in HomeStreet Inc (NASDAQ:HMST). Millennium Management has a $15.4 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second most bullish fund manager is D E Shaw, managed by D. E. Shaw, which holds a $5.3 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining members of the smart money with similar optimism encompass Cliff Asness's AQR Capital Management, Ken Fisher's Fisher Asset Management and Ken Griffin's Citadel Investment Group.
Since HomeStreet Inc (NASDAQ:HMST) has experienced declining sentiment from the smart money, it's easy to see that there lies a certain "tier" of money managers that elected to cut their full holdings last quarter. At the top of the heap, John Overdeck and David Siegel's Two Sigma Advisors cut the biggest position of the 700 funds followed by Insider Monkey, totaling about $0.5 million in stock. David Costen Haley's fund, HBK Investments, also said goodbye to its stock, about $0.3 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds last quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as HomeStreet Inc (NASDAQ:HMST) but similarly valued. We will take a look at Investment Technology Group (NYSE:ITG), Investors Real Estate Trust (NYSE:IRET), Novavax, Inc. (NASDAQ:NVAX), and RISE Education Cayman Ltd (NASDAQ:REDU). All of these stocks' market caps resemble HMST's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ITG,10,30170,-3 IRET,7,34096,0 NVAX,12,23480,1 REDU,5,27518,-5 Average,8.5,28816,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.5 hedge funds with bullish positions and the average amount invested in these stocks was $29 million. That figure was $24 million in HMST's case. Novavax, Inc. (NASDAQ:NVAX) is the most popular stock in this table. On the other hand RISE Education Cayman Ltd (NASDAQ:REDU) is the least popular one with only 5 bullish hedge fund positions. HomeStreet Inc (NASDAQ:HMST) 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. In this regard NVAX might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.