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 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month 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 Amicus Therapeutics, Inc. (NASDAQ:FOLD).
Amicus Therapeutics, Inc. (NASDAQ:FOLD) shareholders have witnessed a decrease in support from the world's most elite money managers recently. Our calculations also showed that FOLD isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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.
[caption id="attachment_758402" align="aligncenter" width="450"] William Leland Edwards of Palo Alto Investors[/caption]
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's check out the latest hedge fund action regarding Amicus Therapeutics, Inc. (NASDAQ:FOLD).
How have hedgies been trading Amicus Therapeutics, Inc. (NASDAQ:FOLD)?
At Q2's end, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in FOLD over the last 16 quarters. With hedgies' capital changing hands, there exists a select group of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
Among these funds, Redmile Group held the most valuable stake in Amicus Therapeutics, Inc. (NASDAQ:FOLD), which was worth $284.5 million at the end of the second quarter. On the second spot was Perceptive Advisors which amassed $268.4 million worth of shares. Moreover, venBio Select Advisor, Palo Alto Investors, and Citadel Investment Group were also bullish on Amicus Therapeutics, Inc. (NASDAQ:FOLD), allocating a large percentage of their portfolios to this stock.
Judging by the fact that Amicus Therapeutics, Inc. (NASDAQ:FOLD) has faced a decline in interest from the aggregate hedge fund industry, we can see that there were a few hedgies that elected to cut their positions entirely last quarter. Interestingly, Amy Mulderry's Tavio Capital sold off the largest position of all the hedgies watched by Insider Monkey, valued at an estimated $4.8 million in stock. Brad Farber's fund, Atika Capital, also dumped its stock, about $2.2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 1 funds last quarter.
Let's go over hedge fund activity in other stocks similar to Amicus Therapeutics, Inc. (NASDAQ:FOLD). We will take a look at Liberty Latin America Ltd. (NASDAQ:LILA), MorphoSys AG (NASDAQ:MOR), Cleveland-Cliffs Inc (NYSE:CLF), and RLJ Lodging Trust (NYSE:RLJ). This group of stocks' market valuations match FOLD's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LILA,11,144973,-3 MOR,6,37770,-1 CLF,28,539781,-7 RLJ,21,179723,0 Average,16.5,225562,-2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $226 million. That figure was $1059 million in FOLD's case. Cleveland-Cliffs Inc (NYSE:CLF) is the most popular stock in this table. On the other hand MorphoSys AG (NASDAQ:MOR) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Amicus Therapeutics, Inc. (NASDAQ:FOLD) is more popular among hedge funds. 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 FOLD wasn't nearly as popular as these 20 stocks and hedge funds that were betting on FOLD were disappointed as the stock returned -35.7% 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 in Q3.
Disclosure: None. This article was originally published at Insider Monkey.