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Were Hedge Funds Right About Dumping Affiliated Managers Group, Inc. (AMG) ?

Abigail Fisher

Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won't accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.

Is Affiliated Managers Group, Inc. (NYSE:AMG) undervalued? The smart money is becoming less confident. The number of long hedge fund bets shrunk by 3 in recent months. Our calculations also showed that AMG isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

AMG_oct2019

Let's analyze the key hedge fund action encompassing Affiliated Managers Group, Inc. (NYSE:AMG).

Hedge fund activity in Affiliated Managers Group, Inc. (NYSE:AMG)

At Q2's end, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the previous quarter. On the other hand, there were a total of 26 hedge funds with a bullish position in AMG a year ago. With hedgies' capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

01 Mason Hawkins, Southeastern Asset Management

More specifically, Southeastern Asset Management was the largest shareholder of Affiliated Managers Group, Inc. (NYSE:AMG), with a stake worth $147.4 million reported as of the end of March. Trailing Southeastern Asset Management was Renaissance Technologies, which amassed a stake valued at $98.9 million. Ariel Investments, Citadel Investment Group, and Polar Capital were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that Affiliated Managers Group, Inc. (NYSE:AMG) has faced bearish sentiment from hedge fund managers, logic holds that there is a sect of funds that decided to sell off their positions entirely by the end of the second quarter. It's worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital dumped the biggest position of the "upper crust" of funds monitored by Insider Monkey, worth about $9.6 million in stock, and Ray Dalio's Bridgewater Associates was right behind this move, as the fund dropped about $1.9 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 3 funds by the end of the second quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Affiliated Managers Group, Inc. (NYSE:AMG) but similarly valued. We will take a look at ADT Inc. (NYSE:ADT), Tilray, Inc. (NASDAQ:TLRY), Luckin Coffee Inc. (NASDAQ:LK), and WPX Energy Inc (NYSE:WPX). All of these stocks' market caps are closest to AMG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ADT,20,157383,4 TLRY,11,26085,1 LK,31,378737,31 WPX,40,726310,-2 Average,25.5,322129,8.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.5 hedge funds with bullish positions and the average amount invested in these stocks was $322 million. That figure was $384 million in AMG's case. WPX Energy Inc (NYSE:WPX) is the most popular stock in this table. On the other hand Tilray, Inc. (NASDAQ:TLRY) is the least popular one with only 11 bullish hedge fund positions. Affiliated Managers Group, Inc. (NYSE:AMG) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately AMG wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AMG investors were disappointed as the stock returned -9.2% during the third quarter 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 many of these stocks already outperformed the market so far in 2019.

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

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