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 returned approximately 26.2% through November 22nd (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 34.7% 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 Jumei International Holding Limited (NYSE:JMEI).
Is Jumei International Holding Limited (NYSE:JMEI) a safe stock to buy now? Investors who are in the know are taking a pessimistic view. The number of bullish hedge fund positions decreased by 3 lately. Our calculations also showed that JMEI isn't among the 30 most popular stocks among hedge funds.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_673876" align="aligncenter" width="473"] John Overdeck of Two Sigma Advisors[/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 analyze the latest hedge fund action encompassing Jumei International Holding Limited (NYSE:JMEI).
How are hedge funds trading Jumei International Holding Limited (NYSE:JMEI)?
At Q3's end, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -50% from the second quarter of 2019. By comparison, 2 hedge funds held shares or bullish call options in JMEI a year ago. With hedgies' sentiment swirling, there exists a few noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
The largest stake in Jumei International Holding Limited (NYSE:JMEI) was held by Renaissance Technologies, which reported holding $7.7 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $0.8 million position. The only other hedge fund that is bullish on the company was Two Sigma Advisors.
Because Jumei International Holding Limited (NYSE:JMEI) has experienced bearish sentiment from the aggregate hedge fund industry, we can see that there were a few hedge funds who sold off their full holdings by the end of the third quarter. It's worth mentioning that Israel Englander's Millennium Management dumped the biggest investment of all the hedgies watched by Insider Monkey, totaling close to $0.4 million in stock, and Ken Griffin's Citadel Investment Group was right behind this move, as the fund sold off about $0.1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 3 funds by the end of the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to Jumei International Holding Limited (NYSE:JMEI). These stocks are ChannelAdvisor Corporation (NYSE:ECOM), National Bankshares Inc. (NASDAQ:NKSH), Catasys, Inc. (NASDAQ:CATS), and Collectors Universe, Inc. (NASDAQ:CLCT). This group of stocks' market valuations are closest to JMEI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ECOM,13,46926,-1 NKSH,2,21129,-1 CATS,7,2325,1 CLCT,9,34458,2 Average,7.75,26210,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.75 hedge funds with bullish positions and the average amount invested in these stocks was $26 million. That figure was $9 million in JMEI's case. ChannelAdvisor Corporation (NYSE:ECOM) is the most popular stock in this table. On the other hand National Bankshares Inc. (NASDAQ:NKSH) is the least popular one with only 2 bullish hedge fund positions. Jumei International Holding Limited (NYSE:JMEI) 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 JMEI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); JMEI investors were disappointed as the stock returned -7.1% 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.