Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like RADCOM Ltd. (NASDAQ:RDCM).
RADCOM Ltd. (NASDAQ:RDCM) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 4 hedge funds' portfolios at the end of the third quarter of 2019. At the end of this article we will also compare RDCM to other stocks including Citizens Community Bancorp Inc. (NASDAQ:CZWI), Travelzoo (NASDAQ:TZOO), and Ovid Therapeutics Inc. (NASDAQ:OVID) to get a better sense of its popularity. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_373490" align="aligncenter" width="640"] Wall Street Bull[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. With all of this in mind we're going to view the key hedge fund action surrounding RADCOM Ltd. (NASDAQ:RDCM).
What have hedge funds been doing with RADCOM Ltd. (NASDAQ:RDCM)?
At Q3's end, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards RDCM over the last 17 quarters. With hedgies' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, William C. Martin's Raging Capital Management has the largest position in RADCOM Ltd. (NASDAQ:RDCM), worth close to $5.8 million, accounting for 0.9% of its total 13F portfolio. The second most bullish fund manager is G2 Investment Partners Management, managed by Josh Goldberg, which holds a $5.5 million position; the fund has 1.6% of its 13F portfolio invested in the stock. Remaining professional money managers with similar optimism comprise Richard Mashaal's Rima Senvest Management, Renaissance Technologies and . In terms of the portfolio weights assigned to each position G2 Investment Partners Management allocated the biggest weight to RADCOM Ltd. (NASDAQ:RDCM), around 1.57% of its 13F portfolio. Raging Capital Management is also relatively very bullish on the stock, dishing out 0.94 percent of its 13F equity portfolio to RDCM.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren't any hedge funds dumping their holdings during the third quarter, there weren't any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven't identified any viable catalysts that can attract investor attention.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as RADCOM Ltd. (NASDAQ:RDCM) but similarly valued. These stocks are Citizens Community Bancorp Inc. (NASDAQ:CZWI), Travelzoo (NASDAQ:TZOO), Ovid Therapeutics Inc. (NASDAQ:OVID), and Old Point Financial Corporation (NASDAQ:OPOF). This group of stocks' market caps match RDCM's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CZWI,4,8408,1 TZOO,9,16544,0 OVID,9,12627,3 OPOF,3,2797,1 Average,6.25,10094,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.25 hedge funds with bullish positions and the average amount invested in these stocks was $10 million. That figure was $15 million in RDCM's case. Travelzoo (NASDAQ:TZOO) is the most popular stock in this table. On the other hand Old Point Financial Corporation (NASDAQ:OPOF) is the least popular one with only 3 bullish hedge fund positions. RADCOM Ltd. (NASDAQ:RDCM) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on RDCM as the stock returned 10.8% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.