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 ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 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' consensus 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 Senior Housing Properties Trust (NYSE:SNH).
Hedge fund interest in Senior Housing Properties Trust (NYSE:SNH) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Trustmark Corp (NASDAQ:TRMK), Cubic Corporation (NYSE:CUB), and Advanced Energy Industries, Inc. (NASDAQ:AEIS) to gather more data points. Our calculations also showed that SNH 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_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds' buy/sell signals. Let's take a glance at the new hedge fund action surrounding Senior Housing Properties Trust (NYSE:SNH).
Hedge fund activity in Senior Housing Properties Trust (NYSE:SNH)
At the end of the third quarter, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards SNH over the last 17 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Renaissance Technologies was the largest shareholder of Senior Housing Properties Trust (NYSE:SNH), with a stake worth $7.6 million reported as of the end of September. Trailing Renaissance Technologies was Two Sigma Advisors, which amassed a stake valued at $6.1 million. AQR Capital Management, Millennium Management, and Arrowstreet Capital 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 Signition LP allocated the biggest weight to Senior Housing Properties Trust (NYSE:SNH), around 0.38% of its 13F portfolio. Two Sigma Advisors is also relatively very bullish on the stock, designating 0.01 percent of its 13F equity portfolio to SNH.
Seeing as Senior Housing Properties Trust (NYSE:SNH) has faced falling interest from hedge fund managers, it's easy to see that there is a sect of funds that elected to cut their full holdings heading into Q4. Intriguingly, Matthew Tewksbury's Stevens Capital Management cut the largest investment of the "upper crust" of funds tracked by Insider Monkey, valued at close to $0.7 million in stock. Paul Marshall and Ian Wace's fund, Marshall Wace, also sold off its stock, about $0.4 million worth. These moves are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Senior Housing Properties Trust (NYSE:SNH) but similarly valued. These stocks are Trustmark Corp (NASDAQ:TRMK), Cubic Corporation (NYSE:CUB), Advanced Energy Industries, Inc. (NASDAQ:AEIS), and American Equity Investment Life Holding (NYSE:AEL). This group of stocks' market caps match SNH's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TRMK,14,24310,0 CUB,16,34965,-3 AEIS,17,121893,3 AEL,18,87521,1 Average,16.25,67172,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $67 million. That figure was $24 million in SNH's case. American Equity Investment Life Holding (NYSE:AEL) is the most popular stock in this table. On the other hand Trustmark Corp (NASDAQ:TRMK) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Senior Housing Properties Trust (NYSE:SNH) is even less popular than TRMK. Hedge funds dodged a bullet by taking a bearish stance towards SNH. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately SNH wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); SNH investors were disappointed as the stock returned -19.7% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.