Did Hedge Funds Make The Right Call On Redwood Trust, Inc. (RWT) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Redwood Trust, Inc. (NYSE:RWT) and determine whether hedge funds skillfully traded this stock.

Redwood Trust, Inc. (NYSE:RWT) shareholders have witnessed an increase in activity from the world’s largest hedge funds in recent months. Our calculations also showed that RWT isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Steven Cohen

Steven Cohen of Point72 Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind we’re going to go over the key hedge fund action surrounding Redwood Trust, Inc. (NYSE:RWT).

What have hedge funds been doing with Redwood Trust, Inc. (NYSE:RWT)?

At Q1’s end, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 69% from the previous quarter. On the other hand, there were a total of 15 hedge funds with a bullish position in RWT a year ago. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

More specifically, Wallace R. Weitz & Co. was the largest shareholder of Redwood Trust, Inc. (NYSE:RWT), with a stake worth $18.1 million reported as of the end of September. Trailing Wallace R. Weitz & Co. was Point72 Asset Management, which amassed a stake valued at $13.8 million. OCO Capital Partners, Adage Capital Management, and HBK Investments 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 OCO Capital Partners allocated the biggest weight to Redwood Trust, Inc. (NYSE:RWT), around 12.38% of its 13F portfolio. Wallace R. Weitz & Co. is also relatively very bullish on the stock, designating 0.96 percent of its 13F equity portfolio to RWT.

Now, specific money managers have been driving this bullishness. OCO Capital Partners, managed by Eric Schneider, initiated the largest position in Redwood Trust, Inc. (NYSE:RWT). OCO Capital Partners had $10.1 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson’s Adage Capital Management also made a $7.6 million investment in the stock during the quarter. The following funds were also among the new RWT investors: David Costen Haley’s HBK Investments, Richard Driehaus’s Driehaus Capital, and Warren Lammert’s Granite Point Capital.

Let’s also examine hedge fund activity in other stocks similar to Redwood Trust, Inc. (NYSE:RWT). These stocks are The Greenbrier Companies Inc (NYSE:GBX), TechTarget Inc (NASDAQ:TTGT), Owens & Minor, Inc. (NYSE:OMI), and Brookdale Senior Living, Inc. (NYSE:BKD). This group of stocks’ market valuations are closest to RWT’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GBX 8 13726 -4
TTGT 14 60057 -2
OMI 16 70459 5
BKD 17 236242 -5
Average 13.75 95121 -1.5

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 $95 million. That figure was $67 million in RWT’s case. Brookdale Senior Living, Inc. (NYSE:BKD) is the most popular stock in this table. On the other hand The Greenbrier Companies Inc (NYSE:GBX) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Redwood Trust, Inc. (NYSE:RWT) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on RWT as the stock returned 40.8% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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