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 12.1% in the first 5 months of this year through May 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month 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' 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 Kornit Digital Ltd. (NASDAQ:KRNT).
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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's take a glance at the key hedge fund action surrounding Kornit Digital Ltd. (NASDAQ:KRNT).
How have hedgies been trading Kornit Digital Ltd. (NASDAQ:KRNT)?
At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -29% from the fourth quarter of 2018. By comparison, 4 hedge funds held shares or bullish call options in KRNT a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Royce & Associates held the most valuable stake in Kornit Digital Ltd. (NASDAQ:KRNT), which was worth $12.5 million at the end of the first quarter. On the second spot was Rima Senvest Management which amassed $9 million worth of shares. Moreover, Driehaus Capital, G2 Investment Partners Management, and D E Shaw were also bullish on Kornit Digital Ltd. (NASDAQ:KRNT), allocating a large percentage of their portfolios to this stock.
Because Kornit Digital Ltd. (NASDAQ:KRNT) has witnessed bearish sentiment from the aggregate hedge fund industry, we can see that there was a specific group of funds who were dropping their entire stakes heading into Q3. Intriguingly, Benjamin A. Smith's Laurion Capital Management dropped the biggest position of all the hedgies monitored by Insider Monkey, worth an estimated $5 million in stock, and Paul Marshall and Ian Wace's Marshall Wace LLP was right behind this move, as the fund dumped about $2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 4 funds heading into Q3.
Let's now take a look at hedge fund activity in other stocks similar to Kornit Digital Ltd. (NASDAQ:KRNT). These stocks are Boot Barn Holdings Inc (NYSE:BOOT), Washington Trust Bancorp (NASDAQ:WASH), OneSpaWorld Holdings Limited (NASDAQ:OSW), and Central Pacific Financial Corp. (NYSE:CPF). This group of stocks' market values are similar to KRNT's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BOOT,23,154459,4 WASH,4,25232,-2 OSW,11,80456,-4 CPF,16,76950,2 Average,13.5,84274,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $84 million. That figure was $43 million in KRNT's case. Boot Barn Holdings Inc (NYSE:BOOT) is the most popular stock in this table. On the other hand Washington Trust Bancorp (NASDAQ:WASH) is the least popular one with only 4 bullish hedge fund positions. Kornit Digital Ltd. (NASDAQ:KRNT) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on KRNT as the stock returned 19.2% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.