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Did Hedge Funds Drop The Ball On MarketAxess Holdings Inc. (MKTX) ?

“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards MarketAxess Holdings Inc. (NASDAQ:MKTX).

Is MarketAxess Holdings Inc. (NASDAQ:MKTX) an outstanding investment today? Hedge funds are getting less bullish. The number of bullish hedge fund positions shrunk by 2 recently. Our calculations also showed that MKTX isn’t among the 30 most popular stocks among hedge funds.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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.

Steve Cohen SAC CAPITAL ADVISORS

We’re going to review the recent hedge fund action surrounding MarketAxess Holdings Inc. (NASDAQ:MKTX).

Hedge fund activity in MarketAxess Holdings Inc. (NASDAQ:MKTX)

Heading into the second quarter of 2019, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -12% from the fourth quarter of 2018. By comparison, 10 hedge funds held shares or bullish call options in MKTX a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

MKTX_jun2019

More specifically, Renaissance Technologies was the largest shareholder of MarketAxess Holdings Inc. (NASDAQ:MKTX), with a stake worth $120.9 million reported as of the end of March. Trailing Renaissance Technologies was Arrowstreet Capital, which amassed a stake valued at $44.7 million. Royce & Associates, AQR Capital Management, and PEAK6 Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that MarketAxess Holdings Inc. (NASDAQ:MKTX) has witnessed a decline in interest from the entirety of the hedge funds we track, logic holds that there was a specific group of money managers who sold off their entire stakes heading into Q3. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management dumped the biggest stake of all the hedgies followed by Insider Monkey, worth an estimated $14 million in stock. Marcelo Desio’s fund, Lucha Capital Management, also dumped its stock, about $5.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 2 funds heading into Q3.

Let’s now review hedge fund activity in other stocks similar to MarketAxess Holdings Inc. (NASDAQ:MKTX). These stocks are Arconic Inc. (NYSE:ARNC), EQT Midstream Partners LP (NYSE:EQM), PVH Corp (NYSE:PVH), and Zendesk Inc (NYSE:ZEN). This group of stocks’ market valuations match MKTX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ARNC 34 2519979 -12
EQM 8 65494 0
PVH 31 1298477 -4
ZEN 53 2095311 0
Average 31.5 1494815 -4

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.5 hedge funds with bullish positions and the average amount invested in these stocks was $1495 million. That figure was $218 million in MKTX’s case. Zendesk Inc (NYSE:ZEN) is the most popular stock in this table. On the other hand EQT Midstream Partners LP (NYSE:EQM) is the least popular one with only 8 bullish hedge fund positions. MarketAxess Holdings Inc. (NASDAQ:MKTX) 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on MKTX as the stock returned 34.9% during the same time frame and outperformed the market by an even larger margin.

Disclosure: None. This article was originally published at Insider Monkey.

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