Some Chinese stocks are bouncing back from the massive losses suffered by many of the country’s companies on both Chinese and International stock markets this week. Shares of YY Inc (ADR) (NASDAQ:YY), Qunar Cayman Islands Ltd (NASDAQ:QUNR) and Cheetah Mobile Inc (ADR) (NYSE:CMCM) have all made significant gains today, though trouble still looms in the markets in their native China. YY Inc shares rallied to as high as $60.43 per share today or 8.71% above the stock’s closing price of $55.59 per share yesterday. Tian Hou at T.H. Capital today upgraded YY Inc to a rating of ‘Buy’ and a price target of $94.00. Qunar Cayman Islands Ltd, on the other hand, jumped to as high as $39.84 per share today or 8.06% above its closing price of $36.87 per share yesterday. The gain follows a significant 7.5% slide on Tuesday. For its part, Cheetah Mobile Inc’s shares were boosted to as high as $23.93 per share, up 8.23% from its closing price of $22.11 per share on Tuesday.
The spikes of YY Inc (ADR) (NASDAQ:YY), Qunar Cayman Islands Ltd (NASDAQ:QUNR) and Cheetah Mobile Inc (ADR) (NYSE:CMCM) shares are an unusual bright spot for Chinese companies, unlike some of their fellow Chinese firms, as bourses in China face what is now three weeks of selloffs. On Wednesday, the Shanghai Composite index dropped 5.9%, bringing its total losses from its high in mid-June to 32.1%. The Shenzhen Composite index also fell, by 2.5%, bringing its total loss to 40% from its high in June. The ChiNext board, comprised primarily of startups also went down, albeit by a smaller 0.5% drop on Wednesday. Trouble in the mainland markets is also spilling into Hong Kong, as the Hang Seng index fell 5.84% today. These drops in the Chinese markets are despite efforts by the country’s authorities to contain losses, even going so far as to have a government-backed fund finance stock purchases. For the three companies who experienced rallies today, hedge funds tracked by Insider Monkey have different views. YY Inc has experienced a decrease in interest from the world’s foremost money managers while Qunar Cayman Islands Ltd and Cheetah Mobile Inc have gotten more attention.
First, a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy – which identifies the best small-cap stock picks of the best hedge fund managers – returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy, you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 135% since the launch of our small-cap strategy compared to less than 60% for the S&P 500 (see the details).
With all of this in mind, let’s take a look at the fresh hedge fund action surrounding YY Inc, Qunar Cayman Islands Ltd, and Cheetah Mobile Inc on the next page.