Hedge funds and other money managers have now filed their quarterly 13Fs for the September quarter, so one can investigate these public filings in order to find potential winners. However, there are some who believe the fact that these public filings are “delayed” means they are not informative (although our research has proven otherwise). Therefore, the camp of ‘13F skeptics’ can follow hedge funds’ 13G and 13D filings instead, which are submitted in a more timely manner and may offer more insights about investors’ stances on different companies. In fact, extensive research has shown that activist targets tend to outperform stock market benchmarks and generate attractive returns uncorrelated with the broader market. With this in mind, the following article will discuss two 13D filings submitted with the SEC by two reputable hedge funds monitored by Insider Monkey.
Following activist funds is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. An activist fund can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activists’ hedge funds has been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns and built a system around this premise. In the 38 months since our small-cap strategy was launched it has returned 102% and beaten the S&P 500 ETF (SPY) by more than 53 percentage points (read more details).
According to a freshly-filed 13D with the SEC, Paul Singer’s Elliott Associates L.P. and its affiliates have combined economic exposure in American Capital Ltd. (NASDAQ:ACAS) of roughly 8.4% of its outstanding common stock. Paul Singer’s activist hedge fund owns 12.23 million shares of common stock, but also holds cash-settled equity swaps with respect to 9.88 million shares. On November 16, Elliott sent a letter to American Capital’s Board of Directors, outlining its disapproval with the company’s intentions to spin out its BDC assets into a new business development company. Singer and his team believe that this move “will put valuable assets at risk, serve to entrench management and significantly limit options for future stockholder value creation”.
Let us remind you that American Capital Ltd. (NASDAQ:ACAS)’s Board decided to split its BDC segment from its funds-management business back in 2014 by spinning-off two business development companies. However, the Board recently revised its plan and decided to concentrate capital in one BDC only. The new BDC would eventually be aimed at expanding the company’s Sponsor Finance business into leading and syndicating large middle market transactions (i.e. unitranche, second lien and mezzanine lending). Going back to the recently-filed 13D, Elliott reckons that the private equity and venture capital firm’s portfolio “could support a share price in excess of $23.00”, which yields an upside of at least 32%. The activist hedge fund also released a presentation that outlines its views on the company’s potential and its ‘destructive’ spin-off in greater detail, but also presents a five-step plan to create greater shareholder value.
In the meantime, the number of hedge funds tracked by Insider Monkey with positions in the private equity and venture capital firm stood at 38 at the end of the second quarter, compared to 33 registered in the prior one. Even so, the value of their investments decreased quarter-over-quarter to $1.27 billion from $1.38 billion. These money managers amassed 34.00% of the company’s outstanding common stock on June 30. Fir Tree, founded by Jeffrey Tannenbaum reported owning 12.05 million shares in American Capital Ltd. (NASDAQ:ACAS) during the latest round of 13F filings.
Let’s head to the next page of the article, where we discuss Eminence Capital’s activist target.
Another Schedule 13D filing disclosed that Ricky Sandler’s Eminence Capital L.P. owns 13.08 million shares of Autodesk Inc. (NASDAQ:ADSK), 683,541 shares of which represent call options. The freshly-disclosed stake accounts for 5.8% of the company’s outstanding common stock. This compares to the ownership stake of 6.64 million shares held by Eminence on September 30. The public filing also reveals that Eminence Capital teamed up with Scott Ferguson’s Sachem Head Capital Management, and that they intend “to coordinate certain efforts with respect to their investment” in the design software and services company. Earlier this month, Sachem filed a 13D reporting an ownership stake of 12.89 million Autodesk shares (read more details).
The leader in 3D design, engineering and entertainment software has seen its shares advance by slightly over 1% since the beginning of the year, thanks to their strong performance during the fourth quarter. The company has been transitioning towards cloud-based services, and recently announced its plans to accelerate its efforts in this sphere so as to take advantage of the platform shift from the desktop to the cloud. However, the company’s margins may suffer in the upcoming quarters due to increased investments in cloud-based infrastructure and marketing efforts.
The number of hedge funds within our database with positions in Autodesk dropped to 45 from 48 during the second quarter, with them stockpiling 19.70% of the company’s shares. Similarly, the value of the money held in the stock by those investors declined to $2.25 billion from $2.52 billion quarter-over-quarter. John Griffin’s Blue Ridge Capital added a 6.92 million-share position in Autodesk Inc. (NASDAQ:ADSK) to its portfolio during the September quarter.