Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves.
Avista Corp (NYSE:AVA) shareholders have witnessed a decrease in enthusiasm from smart money recently. AVA was in 11 hedge funds’ portfolios at the end of the second quarter of 2019. There were 18 hedge funds in our database with AVA holdings at the end of the previous quarter. Our calculations also showed that AVA isn’t among the 30 most popular stocks among hedge funds (view the video below).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s take a glance at the key hedge fund action surrounding Avista Corp (NYSE:AVA).
What have hedge funds been doing with Avista Corp (NYSE:AVA)?
Heading into the third quarter of 2019, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -39% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AVA over the last 16 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
The largest stake in Avista Corp (NYSE:AVA) was held by Renaissance Technologies, which reported holding $79.9 million worth of stock at the end of March. It was followed by D E Shaw with a $23 million position. Other investors bullish on the company included GLG Partners, Millennium Management, and Weld Capital Management.
Since Avista Corp (NYSE:AVA) has faced a decline in interest from hedge fund managers, logic holds that there were a few hedge funds that elected to cut their full holdings heading into Q3. Intriguingly, Alec Litowitz and Ross Laser’s Magnetar Capital dropped the biggest stake of the 750 funds tracked by Insider Monkey, worth about $11.6 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also dropped its stock, about $10.3 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 7 funds heading into Q3.
Let’s now review hedge fund activity in other stocks similar to Avista Corp (NYSE:AVA). We will take a look at Gol Linhas Aereas Inteligentes SA (NYSE:GOL), Kennedy-Wilson Holdings Inc (NYSE:KW), Kennametal Inc. (NYSE:KMT), and Monro, Inc. (NASDAQ:MNRO). This group of stocks’ market values are similar to AVA’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GOL | 8 | 199619 | -8 |
| KW | 13 | 468473 | -1 |
| KMT | 20 | 321757 | 0 |
| MNRO | 14 | 237151 | -3 |
| Average | 13.75 | 306750 | -3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $307 million. That figure was $144 million in AVA’s case. Kennametal Inc. (NYSE:KMT) is the most popular stock in this table. On the other hand Gol Linhas Aereas Inteligentes SA (NYSE:GOL) is the least popular one with only 8 bullish hedge fund positions. Avista Corp (NYSE:AVA) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on AVA as the stock returned 9.5% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
