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Did Smart Money Bet on Alcoa’s Separation?

After closing slightly in the red on Friday, Alcoa Inc (NYSE:AA)‘s stock gained almost 5% in pre-market trading on the back of the announcement that the company will split into two publicly-traded companies. The development might finally give the stock, which slid by over 40% year-to-date, some room to breathe. Moreover, the decision will definitely please hedge funds from our database, which amassed over 8% of the company’s shares at the end of June. Let’s take a closer look at the news and see the hedge fund sentiment surrounding Alcoa to see whether smart money have been betting on the long-term growth of the company.


When it comes to assessing hedge fund sentiment, many investors overlook the fact that hedge funds invest for the long-term and don’t pay a lot of attention to this metric. Another reason is that hedge funds’ performance has been lagging for the last several years, but, again, what many forget is that hedge funds have grown very large and have to hedge most of their exposure to equities. At Insider Monkey we analyze the data from 13F filings of over 730 hedge funds as part of our strategy that involves imitating the 15 most popular small-cap stocks, and which returned some 118% over the last three years (read more details here), outperforming the S&P 500 ETF (SPY) by some 60 percentage points. The strategy is based on the results of extensive research that covered over a decade of 13F filings and which showed that hedge funds’ top small-cap ideas can beat the market by around 95 basis points per month on average, as opposed to the 50 most popular stocks among them, which underperformed the market by some seven basis points per month.

With this in mind, let’s take a closer look at Alcoa Inc (NYSE:AA)’s latest development. The announced separation is expected to be completed in the second half of next year and will create two companies, including Upstream, which will have five business units focused on Bauxite, Alumina, Aluminum, Casting, and Energy. The second company, Value-Add, will comprise Global Rolled Products, Engineered Products and Solutions, and the Transportation and Construction Solutions units. The transaction is planned as tax-free and the current shareholders of Alcoa will receive all of the outstanding stock of each company.

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Some of the best investors have been betting on the long-term appreciation of Alcoa Inc (NYSE:AA) as our data shows. During the second quarter the number of funds with long positions inched up by two to 45, while the aggregate value of their holdings surged to $1.12 billion from $1.09 billion and accounted for 8.30% of the company’s value at the end of June. Most of the top shareholders in our database have boosted their stakes in the company recently. For example, Robert Rodriguez and Steven Romick‘s First Pacific Advisors, which stands on the first spot, upped its stake by 58% on the quarter to 34.88 million shares, while the third-largest shareholder, Ken Griffin’s Citadel Investment Group, more than doubled its position to 5.71 million shares. Moreover, two large investors initiated stakes during the second quarter: George Soros’ Soros Fund Management (see his other new picks) and Duquesne Capital, managed by Stanley Druckenmiller. Both funds reported ownership of 5.34 million shares and 3.65 million shares respectively.

Taking into account that hedge funds have remained bullish on Alcoa Inc (NYSE:AA) despite the weak performance of the stock, it seems they have anticipated a development that could increase the shareholder value such as the one we witnessed this morning.

Disclosure: None

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