Did Hedge Funds Anticipate Solera Holdings Inc (SLH)’s Big Day?

Solera Holdings Inc (NYSE:SLH)‘s stock is up by about 8.55% in trading today after the company confirmed a $6.5 billion buyout offer from Vista Equity Partners. Other parties alongside Vista which are involved in this definitive merger agreement include Koch Equity Development LLC, and an affiliate of Goldman, Sachs & Co. The deal is to acquire Solera for $55.85 per share, which represents a premium of about 17% on the stock’s closing price on Friday. The expected closing of the deal is in the first quarter of next year. Solera Holdings Inc (NYSE:SLH), the $3.31 billion provider of software and services is primarily engaged in automobiles claims. The company’s CEO and founder Tony Aquila said that this event is a pivotal point for the company, as it provides it with the opportunity to proliferate while at the same time creating significant value for its shareholders.

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At this point it is interesting to see if the hedge fund community recognized the potential of Solera Holdings Inc (NYSE:SLH) beforehand. Our data of second quarter hedge fund activity shows that generally, professional money managers had this one right. Among over 700 hedge funds that we track, a total of 18 had an aggregate investment of $290.10 million in the company at the end of June compared to 15 firms with $259.69 million in shares at the end of March. The aggregate increase came despite a 14% drop in Solera’s stock price during the second trimester.

Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 118% over the last 36 months and outperformed the S&P 500 Index by over 60 percentage points (see the details here).

Digging a little deeper into the hedge fund sentiment surrounding Solera Holdings Inc (NYSE:SLH), we find that Fir Tree, founded by Jeffrey Tannenbaum, tops our list of the company’s stockholders, having initiated a stake in Solera during the June quarter of about 2.13 million shares valued at $94.78 million. Ken Griffin‘s managed futures fund Citadel Investment Group and Lee Munder‘s Lee Munder Capital Group were the second and third-largest shareholders of the company, and reduced their respective holdings by 18% to 1.68 million shares valued at $74.91 million and by 9% to 634,500 shares valued at $28.27 million respectively. Among the top ten stockholders, Israel Englander‘s Millennium Management hiked its stake the most, by 75% to about 290,100 shares valued at $12.93 million.