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 in the first 2.5 months of this year the Standard and Poor’s 500 Index returned approximately 13.1% (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only 5% due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns (5%) 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 Retail Value Inc. (NYSE:RVI).
Is Retail Value Inc. (NYSE:RVI) ready to rally soon? Prominent investors are getting less optimistic. The number of long hedge fund bets were trimmed by 3 in recent months. Our calculations also showed that rvi isn't among the 30 most popular stocks among hedge funds. RVI was in 13 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 16 hedge funds in our database with RVI positions at the end of the previous quarter.
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 32 percentage points since May 2014 through March 12, 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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's take a look at the fresh hedge fund action regarding Retail Value Inc. (NYSE:RVI).
What does the smart money think about Retail Value Inc. (NYSE:RVI)?
At the end of the fourth quarter, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from the second quarter of 2018. On the other hand, there were a total of 0 hedge funds with a bullish position in RVI 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.
The largest stake in Retail Value Inc. (NYSE:RVI) was held by Luxor Capital Group, which reported holding $64 million worth of stock at the end of December. It was followed by Blue Mountain Capital with a $12.2 million position. Other investors bullish on the company included Indaba Capital Management, Newtyn Management, and Hawk Ridge Management.
Seeing as Retail Value Inc. (NYSE:RVI) has witnessed falling interest from the aggregate hedge fund industry, we can see that there was a specific group of hedge funds who were dropping their entire stakes in the third quarter. It's worth mentioning that Jonathan Litt's Land & Buildings Investment Management sold off the largest position of all the hedgies monitored by Insider Monkey, valued at an estimated $14 million in stock. Noam Gottesman's fund, GLG Partners, also dropped its stock, about $1.9 million worth. These transactions are important to note, as total hedge fund interest dropped by 3 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to Retail Value Inc. (NYSE:RVI). We will take a look at The Hackett Group, Inc. (NASDAQ:HCKT), Dorchester Minerals LP (NASDAQ:DMLP), Control4 Corp (NASDAQ:CTRL), and One Liberty Properties, Inc. (NYSE:OLP). All of these stocks' market caps are similar to RVI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HCKT,10,62762,0 DMLP,6,28582,0 CTRL,12,34532,0 OLP,5,22345,-1 Average,8.25,37055,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.25 hedge funds with bullish positions and the average amount invested in these stocks was $37 million. That figure was $128 million in RVI's case. Control4 Corp (NASDAQ:CTRL) is the most popular stock in this table. On the other hand One Liberty Properties, Inc. (NYSE:OLP) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Retail Value Inc. (NYSE:RVI) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on RVI as the stock returned 28.3% 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.