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 26.2% through November 22nd (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 34.7% 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 Synthetic Biologics Inc (NYSE:SYN).
Hedge fund interest in Synthetic Biologics Inc (NYSE:SYN) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare SYN to other stocks including Vislink Technologies, Inc. (NASDAQ:VISL), SAExploration Holdings, Inc. (NASDAQ:SAEX), and Novus Therapeutics, Inc. (NASDAQ:NVUS) to get a better sense of its popularity.
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_27209" align="aligncenter" width="444"] Jim Simons Founder of Renaissance Technologies[/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. We're going to go over the key hedge fund action surrounding Synthetic Biologics Inc (NYSE:SYN).
Hedge fund activity in Synthetic Biologics Inc (NYSE:SYN)
Heading into the fourth quarter of 2019, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 3 hedge funds with a bullish position in SYN a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
The largest stake in Synthetic Biologics Inc (NYSE:SYN) was held by Alyeska Investment Group, which reported holding $2.3 million worth of stock at the end of September. It was followed by Sabby Capital with a $0.4 million position. The only other hedge fund that is bullish on the company was Renaissance Technologies.
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 check out hedge fund activity in other stocks - not necessarily in the same industry as Synthetic Biologics Inc (NYSE:SYN) but similarly valued. These stocks are Vislink Technologies, Inc. (NASDAQ:VISL), SAExploration Holdings, Inc. (NASDAQ:SAEX), Novus Therapeutics, Inc. (NASDAQ:NVUS), and Genius Brands International, Inc. (NASDAQ:GNUS). All of these stocks' market caps resemble SYN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VISL,3,293,1 SAEX,5,1548,-1 NVUS,5,3157,0 GNUS,1,11,0 Average,3.5,1252,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 3.5 hedge funds with bullish positions and the average amount invested in these stocks was $1 million. That figure was $1 million in SYN's case. SAExploration Holdings, Inc. (NASDAQ:SAEX) is the most popular stock in this table. On the other hand Genius Brands International, Inc. (NASDAQ:GNUS) is the least popular one with only 1 bullish hedge fund positions. Synthetic Biologics Inc (NYSE:SYN) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately SYN wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SYN investors were disappointed as the stock returned -11.1% during the fourth quarter (through 11/22) 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 in Q4.
Disclosure: None. This article was originally published at Insider Monkey.