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Did Hedge Funds Make The Right Call On Tradeweb Markets Inc. (TW) ?

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 Tradeweb Markets Inc. (NASDAQ:TW) and determine whether hedge funds had an edge regarding this stock.

Is Tradeweb Markets Inc. (NASDAQ:TW) a bargain? Hedge funds were taking a bearish view. The number of bullish hedge fund positions fell by 6 lately. Our calculations also showed that TW 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 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 S&P 500 ETFs by 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 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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this tiny lithium stock. Now we’re going to take a look at the recent hedge fund action surrounding Tradeweb Markets Inc. (NASDAQ:TW).

How have hedgies been trading Tradeweb Markets Inc. (NASDAQ:TW)?

Heading into the second quarter of 2020, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the fourth quarter of 2019. By comparison, 0 hedge funds held shares or bullish call options in TW a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Is TW A Good Stock To Buy?

More specifically, Alkeon Capital Management was the largest shareholder of Tradeweb Markets Inc. (NASDAQ:TW), with a stake worth $60.3 million reported as of the end of September. Trailing Alkeon Capital Management was Samlyn Capital, which amassed a stake valued at $52.3 million. Two Sigma Advisors, Renaissance Technologies, and Harbor Spring 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 Parsifal Capital Management allocated the biggest weight to Tradeweb Markets Inc. (NASDAQ:TW), around 8.11% of its 13F portfolio. Totem Point Management is also relatively very bullish on the stock, setting aside 3.66 percent of its 13F equity portfolio to TW.

Judging by the fact that Tradeweb Markets Inc. (NASDAQ:TW) has faced falling interest from hedge fund managers, we can see that there exists a select few hedgies that slashed their positions entirely last quarter. At the top of the heap, Doug Silverman and Alexander Klabin’s Senator Investment Group cut the largest stake of all the hedgies watched by Insider Monkey, worth an estimated $69.5 million in stock, and James Parsons’s Junto Capital Management was right behind this move, as the fund dumped about $42.1 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 6 funds last quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Tradeweb Markets Inc. (NASDAQ:TW) but similarly valued. We will take a look at Cable One Inc (NYSE:CABO), Carnival Corporation (NYSE:CCL), Qorvo Inc (NASDAQ:QRVO), and Varian Medical Systems, Inc. (NYSE:VAR). All of these stocks’ market caps match TW’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CABO 23 674859 4
CCL 31 146189 -3
QRVO 39 1165693 -6
VAR 25 439921 -5
Average 29.5 606666 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $607 million. That figure was $355 million in TW’s case. Qorvo Inc (NASDAQ:QRVO) is the most popular stock in this table. On the other hand Cable One Inc (NYSE:CABO) is the least popular one with only 23 bullish hedge fund positions. Tradeweb Markets Inc. (NASDAQ:TW) is not the most popular stock in this group but hedge fund interest is still above average. 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 but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on TW as the stock returned 38.5% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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