Before we spend many hours researching a company, we’d like to analyze what hedge funds and billionaire investors think of the stock first. We would like to do so because the elite investors’ consensus returns historically managed to outperform the market. You probably won’t agree with this statement if you have been reading headlines about hedge funds’ losses in Valeant (VRX) since last September. Although the elite funds occasionally have their duds our research have shown that the hedge fund picks seem to work on average. For example the 30 most popular large-cap stocks among hedge funds generate an annual alpha of 2 percentage points in our backtests. On the other hand, hedge funds’ consensus small-cap picks historically outperformed the market by double digits annually.
This year isn’t an exception. Insider Monkey tracks more than 800 hedge funds. We created a giant portfolio of hedge funds’ top 2600 stocks where each position’s weight in the portfolio is proportional to the total dollar value of aggregate hedge fund long positions in the stock. This portfolio lost 4.7% this year through the end of February vs. 5.2% loss for the S&P 500 Total Return Index and 8.8% loss for the Russell 2000 Index. This isn’t a small portfolio either. The total value of this hedge fund portfolio is $1.6 trillion and each percentage point outperformance corresponds to $16 billion in “value added” by hedge funds.
Overall, these results tell us three things. First, it really doesn’t make sense for investors to invest in an average hedge fund that invests in large-cap stocks because most hedge funds charge astronomical fees for their slightly improved performance. Second, it may be a good idea to invest in a hedge fund that plows through undercovered small-cap stocks. Last but not least, the best strategy for investors to take advantage of hedge funds’ superior stock picking ability is to imitate their consensus stock picks by themselves. In any case, we believe, every investor should check out the hedge fund sentiment in the stocks that they are considering to trade. In this article we will take a closer look at Allergan.
Allergan, Inc. (NYSE:AGN) has been hedge funds’ top choice for a while now. AGN was in 159 hedge funds’ portfolios at the end of the fourth quarter of 2015. There were 151 hedge funds in our database with AGN holdings at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Unilever plc (ADR) (NYSE:UL), Amgen, Inc. (NASDAQ:AMGN), and PetroChina Company Limited (ADR) (NYSE:PTR) to gather more data points. But first we will share a few quotes from hedge fund investor letters that explain why hedge funds like Allergan. Here is what Dan Loeb said about the stock last year:
