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Were Hedge Funds Right About Betting On Alibaba Group Holding Limited (BABA)?

Asma UL Husna
·6 min read

Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 850 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds' 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about Alibaba Group Holding Limited (NYSE:BABA) in this article.

Alibaba Group Holding Limited (NYSE:BABA) has consistently been one of the top 10 hedge fund stocks for a very long time. Even the number of long hedge fund bets were trimmed by 13 in recent months, BABA still ranks #4 among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Alibaba Group Holding Limited (NYSE:BABA) was in 154 hedge funds' portfolios at the end of June. The all time high for this statistics is 170. Video: 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (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 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Andreas Halvorsen
Andreas Halvorsen

Andreas Halvorsen of Viking Global

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now we're going to review the new hedge fund action encompassing Alibaba Group Holding Limited (NYSE:BABA).

Hedge fund activity in Alibaba Group Holding Limited (NYSE:BABA)

Heading into the third quarter of 2020, a total of 154 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from the first quarter of 2020. On the other hand, there were a total of 127 hedge funds with a bullish position in BABA a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Alibaba Group Holding Limited (NYSE:BABA) was held by Fisher Asset Management, which reported holding $2922.7 million worth of stock at the end of September. It was followed by GQG Partners with a $2245.7 million position. Other investors bullish on the company included Citadel Investment Group, Soroban Capital Partners, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Serenity Capital allocated the biggest weight to Alibaba Group Holding Limited (NYSE:BABA), around 50.78% of its 13F portfolio. Joho Capital is also relatively very bullish on the stock, designating 47.43 percent of its 13F equity portfolio to BABA.

Because Alibaba Group Holding Limited (NYSE:BABA) has witnessed a decline in interest from hedge fund managers, logic holds that there was a specific group of money managers that elected to cut their positions entirely last quarter. It's worth mentioning that Lone Pine Capital sold off the largest stake of the "upper crust" of funds followed by Insider Monkey, worth close to $1232.3 million in stock, and Jim Davidson, Dave Roux and Glenn Hutchins's Silver Lake Partners was right behind this move, as the fund sold off about $697.6 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 13 funds last quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Alibaba Group Holding Limited (NYSE:BABA) but similarly valued. We will take a look at Berkshire Hathaway Inc. (NYSE:BRK-B), Visa Inc (NYSE:V), Johnson & Johnson (NYSE:JNJ), Walmart Inc. (NYSE:WMT), Mastercard Incorporated (NYSE:MA), The Procter & Gamble Company (NYSE:PG), and Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM). This group of stocks' market valuations resemble BABA's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BRK-B,107,15633556,-8 V,154,17010420,-3 JNJ,94,4731250,12 WMT,60,5829223,5 MA,147,14350337,8 PG,73,9244143,-4 TSM,58,5209772,4 Average,99,10286957,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 99 hedge funds with bullish positions and the average amount invested in these stocks was $10287 million. That figure was $24386 million in BABA's case. Visa Inc (NYSE:V) is the most popular stock in this table. On the other hand Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is the least popular one with only 58 bullish hedge fund positions. Alibaba Group Holding Limited (NYSE:BABA) is not the most popular stock in this group but hedge fund interest is still way above average. Our overall hedge fund sentiment score for BABA is 95.2 (out of 100). Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. Hedge funds were also right about betting on BABA as the stock returned 42.5% since the end of Q2 (through 10/16) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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Disclosure: None. This article was originally published at Insider Monkey.

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