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Were Hedge Funds Right About Warming Up To NVIDIA Corporation (NVDA)?

Abigail Fisher

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards NVIDIA Corporation (NASDAQ:NVDA).

Is NVIDIA Corporation (NASDAQ:NVDA) a buy, sell, or hold? The smart money is getting more optimistic. The number of long hedge fund bets increased by 3 recently. Our calculations also showed that NVDA isn't among the 30 most popular stocks among hedge funds. NVDA was in 48 hedge funds' portfolios at the end of the third quarter of 2019. There were 45 hedge funds in our database with NVDA holdings at the end of the previous quarter.

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 has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_26575" align="aligncenter" width="471"] Louis Bacon of Moore Global Investments[/caption]

MOORE GLOBAL INVESTMENTS

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 check out the key hedge fund action regarding NVIDIA Corporation (NASDAQ:NVDA).

What have hedge funds been doing with NVIDIA Corporation (NASDAQ:NVDA)?

At the end of the third quarter, a total of 48 of the hedge funds tracked by Insider Monkey were long this stock, a change of 7% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in NVDA over the last 17 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.

NVDA_nov2019

The largest stake in NVIDIA Corporation (NASDAQ:NVDA) was held by D E Shaw, which reported holding $469.5 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $176.1 million position. Other investors bullish on the company included Renaissance Technologies, Laurion Capital Management, and Adage Capital Management. In terms of the portfolio weights assigned to each position Keywise Capital Management allocated the biggest weight to NVIDIA Corporation (NASDAQ:NVDA), around 13.69% of its portfolio. Ratan Capital Group is also relatively very bullish on the stock, earmarking 6.58 percent of its 13F equity portfolio to NVDA.

As aggregate interest increased, specific money managers have been driving this bullishness. Moore Global Investments, managed by Louis Bacon, created the largest position in NVIDIA Corporation (NASDAQ:NVDA). Moore Global Investments had $10.4 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace's Marshall Wace also made a $6.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Ray Dalio's Bridgewater Associates, Ed Bosek's BeaconLight Capital, and Minhua Zhang's Weld Capital Management.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as NVIDIA Corporation (NASDAQ:NVDA) but similarly valued. These stocks are Starbucks Corporation (NASDAQ:SBUX), Linde plc (NYSE:LIN), ASML Holding N.V. (NASDAQ:ASML), and Danaher Corporation (NYSE:DHR). This group of stocks' market caps are similar to NVDA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SBUX,52,5593793,3 LIN,44,2523402,3 ASML,15,774677,3 DHR,57,2732120,-1 Average,42,2905998,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 42 hedge funds with bullish positions and the average amount invested in these stocks was $2906 million. That figure was $1473 million in NVDA's case. Danaher Corporation (NYSE:DHR) is the most popular stock in this table. On the other hand ASML Holding N.V. (NASDAQ:ASML) is the least popular one with only 15 bullish hedge fund positions. NVIDIA Corporation (NASDAQ:NVDA) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on NVDA as the stock returned 21.2% during the fourth quarter (through 11/22) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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