Did Hedge Funds Drop The Ball On TAL Education Group (TAL) ?

Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like TAL Education Group (NYSE:TAL).

Is TAL Education Group (NYSE:TAL) a bargain? Money managers are selling. The number of long hedge fund positions went down by 5 in recent months. Our calculations also showed that TAL isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

To the average investor there are many metrics stock traders put to use to evaluate their holdings. A pair of the less utilized metrics are hedge fund and insider trading signals. We have shown that, historically, those who follow the top picks of the top hedge fund managers can outclass their index-focused peers by a solid amount (see the details here).

Chase Coleman of Tiger Global

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a look at the latest hedge fund action surrounding TAL Education Group (NYSE:TAL).

What have hedge funds been doing with TAL Education Group (NYSE:TAL)?

Heading into the fourth quarter of 2019, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -20% from one quarter earlier. By comparison, 25 hedge funds held shares or bullish call options in TAL a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Hillhouse Capital Management held the most valuable stake in TAL Education Group (NYSE:TAL), which was worth $487.2 million at the end of the third quarter. On the second spot was Tiger Global Management which amassed $322.7 million worth of shares. Tybourne Capital Management, Serenity Capital, and Yiheng Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Serenity Capital allocated the biggest weight to TAL Education Group (NYSE:TAL), around 37.73% of its 13F portfolio. Yiheng Capital is also relatively very bullish on the stock, designating 19.79 percent of its 13F equity portfolio to TAL.

Because TAL Education Group (NYSE:TAL) has experienced falling interest from hedge fund managers, it’s easy to see that there lies a certain “tier” of hedge funds that slashed their full holdings last quarter. Intriguingly, Yi Xin’s Ariose Capital dumped the biggest position of all the hedgies monitored by Insider Monkey, worth an estimated $37.3 million in stock. Richard Driehaus’s fund, Driehaus Capital, also said goodbye to its stock, about $32.1 million worth. These transactions are interesting, as total hedge fund interest fell by 5 funds last quarter.

Let’s check out hedge fund activity in other stocks similar to TAL Education Group (NYSE:TAL). These stocks are Match Group, Inc. (NASDAQ:MTCH), Northern Trust Corporation (NASDAQ:NTRS), Boston Properties, Inc. (NYSE:BXP), and Vulcan Materials Company (NYSE:VMC). This group of stocks’ market values match TAL’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MTCH 41 1106508 10
NTRS 21 316167 -8
BXP 24 447838 1
VMC 53 1965254 1
Average 34.75 958942 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.75 hedge funds with bullish positions and the average amount invested in these stocks was $959 million. That figure was $1504 million in TAL’s case. Vulcan Materials Company (NYSE:VMC) is the most popular stock in this table. On the other hand Northern Trust Corporation (NASDAQ:NTRS) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks TAL Education Group (NYSE:TAL) is even less popular than NTRS. Hedge funds clearly dropped the ball on TAL as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on TAL as the stock returned 29.3% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.

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