Concerns over rising interest rates and expected further rate increases have hit several stocks hard during the fourth quarter. Trends reversed 180 degrees during the first quarter amid Powell's pivot and optimistic expectations towards a trade deal with China. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were increasing their overall exposure in the first quarter and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA).
Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) has experienced an increase in hedge fund sentiment in recent months. Our calculations also showed that KNSA isn't among the 30 most popular stocks among hedge funds.
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 40 percentage points since May 2014 through May 30, 2019 (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.
We're going to take a peek at the latest hedge fund action encompassing Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA).
What have hedge funds been doing with Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA)?
Heading into the second quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 25% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards KNSA over the last 15 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) was held by Baker Bros. Advisors, which reported holding $54.2 million worth of stock at the end of March. It was followed by Deerfield Management with a $23.7 million position. Other investors bullish on the company included Vivo Capital, Cormorant Asset Management, and Alyeska Investment Group.
As industrywide interest jumped, key hedge funds have jumped into Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) headfirst. Alyeska Investment Group, managed by Anand Parekh, assembled the most valuable position in Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA). Alyeska Investment Group had $2.4 million invested in the company at the end of the quarter. Sander Gerber's Hudson Bay Capital Management also made a $1.6 million investment in the stock during the quarter. The only other fund with a brand new KNSA position is Ori Hershkovitz's Nexthera Capital.
Let's now take a look at hedge fund activity in other stocks similar to Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA). We will take a look at InflaRx N.V. (NASDAQ:IFRX), Third Point Reinsurance Ltd (NYSE:TPRE), FB Financial Corporation (NYSE:FBK), and Kadant Inc. (NYSE:KAI). This group of stocks' market valuations are closest to KNSA's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IFRX,15,411437,2 TPRE,19,76399,1 FBK,5,100875,-3 KAI,17,93212,0 Average,14,170481,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $170 million. That figure was $108 million in KNSA's case. Third Point Reinsurance Ltd (NYSE:TPRE) is the most popular stock in this table. On the other hand FB Financial Corporation (NYSE:FBK) is the least popular one with only 5 bullish hedge fund positions. Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) 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 KNSA wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); KNSA investors were disappointed as the stock returned -23.5% 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.