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 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority 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' consensus 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 QuinStreet Inc (NASDAQ:QNST).
QuinStreet Inc (NASDAQ:QNST) shareholders have witnessed a decrease in hedge fund sentiment recently. Our calculations also showed that QNST isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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' 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 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 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.
[caption id="attachment_747408" align="aligncenter" width="473"] Paul Reeder of PAR Capital Management[/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 gander at the recent hedge fund action regarding QuinStreet Inc (NASDAQ:QNST).
What does smart money think about QuinStreet Inc (NASDAQ:QNST)?
At Q3's end, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the previous quarter. By comparison, 28 hedge funds held shares or bullish call options in QNST a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
Among these funds, Private Capital Management held the most valuable stake in QuinStreet Inc (NASDAQ:QNST), which was worth $45.7 million at the end of the third quarter. On the second spot was Park West Asset Management which amassed $42.6 million worth of shares. Rubric Capital Management, PAR Capital Management, and Royce & Associates were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Private Capital Management allocated the biggest weight to QuinStreet Inc (NASDAQ:QNST), around 7.94% of its 13F portfolio. Red Cedar Management is also relatively very bullish on the stock, setting aside 5.82 percent of its 13F equity portfolio to QNST.
Seeing as QuinStreet Inc (NASDAQ:QNST) has faced declining sentiment from the aggregate hedge fund industry, it's safe to say that there lies a certain "tier" of hedgies who were dropping their positions entirely last quarter. At the top of the heap, Richard Driehaus's Driehaus Capital dropped the largest position of all the hedgies watched by Insider Monkey, comprising close to $14.4 million in stock. Peter Rathjens, Bruce Clarke and John Campbell's fund, Arrowstreet Capital, also dropped its stock, about $3.3 million worth. These moves are interesting, as total hedge fund interest dropped by 2 funds last quarter.
Let's now take a look at hedge fund activity in other stocks similar to QuinStreet Inc (NASDAQ:QNST). These stocks are Solaris Oilfield Infrastructure, Inc. (NYSE:SOI), Corenergy Infrastructure Trust Inc (NYSE:CORR), Innophos Holdings, Inc. (NASDAQ:IPHS), and Fly Leasing Ltd (NYSE:FLY). This group of stocks' market values are closest to QNST's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SOI,9,67101,-5 CORR,9,66642,-1 IPHS,12,42749,0 FLY,7,70263,0 Average,9.25,61689,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $62 million. That figure was $177 million in QNST's case. Innophos Holdings, Inc. (NASDAQ:IPHS) is the most popular stock in this table. On the other hand Fly Leasing Ltd (NYSE:FLY) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks QuinStreet Inc (NASDAQ:QNST) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on QNST as the stock returned 25% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.