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Did Hedge Funds Make The Right Call On Tencent Music Entertainment Group (TME) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Tencent Music Entertainment Group (NYSE:TME) and determine whether hedge funds had an edge regarding this stock.

Tencent Music Entertainment Group (NYSE:TME) has seen a decrease in hedge fund sentiment of late. TME was in 25 hedge funds’ portfolios at the end of March. There were 26 hedge funds in our database with TME holdings at the end of the previous quarter. Our calculations also showed that TME 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.

To most traders, hedge funds are assumed to be underperforming, old investment vehicles of yesteryear. While there are greater than 8000 funds with their doors open at the moment, Our researchers hone in on the moguls of this group, approximately 850 funds. Most estimates calculate that this group of people shepherd most of the smart money’s total asset base, and by tailing their matchless stock picks, Insider Monkey has spotted various investment strategies that have historically exceeded the market. Insider Monkey’s flagship short hedge fund strategy outpaced the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Eashwar Krishnan - Tybourne Capital

Eashwar Krishnan of Tybourne Capital 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. Now let’s take a gander at the new hedge fund action regarding Tencent Music Entertainment Group (NYSE:TME).

How have hedgies been trading Tencent Music Entertainment Group (NYSE:TME)?

At Q1’s end, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TME over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

Is TME A Good Stock To Buy?

More specifically, D1 Capital Partners was the largest shareholder of Tencent Music Entertainment Group (NYSE:TME), with a stake worth $127.1 million reported as of the end of September. Trailing D1 Capital Partners was Tybourne Capital Management, which amassed a stake valued at $80.6 million. Tiger Pacific Capital, Kingstown Capital Management, and Tiger Global Management LLC 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 Tiger Pacific Capital allocated the biggest weight to Tencent Music Entertainment Group (NYSE:TME), around 22.51% of its 13F portfolio. Hidden Lake Asset Management is also relatively very bullish on the stock, dishing out 12.47 percent of its 13F equity portfolio to TME.

Seeing as Tencent Music Entertainment Group (NYSE:TME) has faced declining sentiment from the smart money, it’s safe to say that there is a sect of money managers that elected to cut their entire stakes heading into Q4. At the top of the heap, David Fiszel’s Honeycomb Asset Management cut the biggest investment of the “upper crust” of funds tracked by Insider Monkey, totaling about $74.3 million in stock. Simon Sadler’s fund, Segantii Capital, also dumped its stock, about $7 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds heading into Q4.

Let’s go over hedge fund activity in other stocks similar to Tencent Music Entertainment Group (NYSE:TME). We will take a look at Simon Property Group, Inc (NYSE:SPG), CMS Energy Corporation (NYSE:CMS), Parker-Hannifin Corporation (NYSE:PH), and DocuSign, Inc. (NASDAQ:DOCU). This group of stocks’ market caps are closest to TME’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SPG 29 419445 3
CMS 28 421101 -2
PH 32 889095 -7
DOCU 47 1082768 14
Average 34 703102 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $703 million. That figure was $456 million in TME’s case. DocuSign, Inc. (NASDAQ:DOCU) is the most popular stock in this table. On the other hand CMS Energy Corporation (NYSE:CMS) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks Tencent Music Entertainment Group (NYSE:TME) is even less popular than CMS. Hedge funds clearly dropped the ball on TME as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on TME as the stock returned 33.8% in the second quarter and outperformed the market by an even larger margin.

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