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 New Residential Investment Corp (NYSE:NRZ).
New Residential Investment Corp (NYSE:NRZ) was in 25 hedge funds' portfolios at the end of the fourth quarter of 2018. NRZ investors should pay attention to an increase in enthusiasm from smart money lately. There were 16 hedge funds in our database with NRZ holdings at the end of the previous quarter. Our calculations also showed that NRZ isn't among the 30 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 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 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.
We're going to view the latest hedge fund action surrounding New Residential Investment Corp (NYSE:NRZ).
What have hedge funds been doing with New Residential Investment Corp (NYSE:NRZ)?
At the end of the fourth quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 56% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in NRZ over the last 14 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in New Residential Investment Corp (NYSE:NRZ) was held by Renaissance Technologies, which reported holding $49 million worth of stock at the end of September. It was followed by Kingstown Capital Management with a $21.3 million position. Other investors bullish on the company included Whitebox Advisors, Millennium Management, and Balyasny Asset Management.
With a general bullishness amongst the heavyweights, specific money managers were leading the bulls' herd. Balyasny Asset Management, managed by Dmitry Balyasny, created the most outsized position in New Residential Investment Corp (NYSE:NRZ). Balyasny Asset Management had $12.3 million invested in the company at the end of the quarter. Andrew Feldstein and Stephen Siderow's Blue Mountain Capital also made a $7.8 million investment in the stock during the quarter. The other funds with brand new NRZ positions are Michael Hintze's CQS Cayman LP, Matthew Hulsizer's PEAK6 Capital Management, and Andrew Weiss's Weiss Asset Management.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as New Residential Investment Corp (NYSE:NRZ) but similarly valued. These stocks are The Chemours Company (NYSE:CC), EQT Corporation (NYSE:EQT), Owens Corning (NYSE:OC), and Zscaler, Inc. (NASDAQ:ZS). All of these stocks' market caps are similar to NRZ's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CC,28,496631,-3 EQT,44,1317248,-1 OC,40,838801,8 ZS,17,91542,-11 Average,32.25,686056,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 32.25 hedge funds with bullish positions and the average amount invested in these stocks was $686 million. That figure was $144 million in NRZ's case. EQT Corporation (NYSE:EQT) is the most popular stock in this table. On the other hand Zscaler, Inc. (NASDAQ:ZS) is the least popular one with only 17 bullish hedge fund positions. New Residential Investment Corp (NYSE:NRZ) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on NRZ, though not to the same extent, as the stock returned 20.5% and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.