Did Hedge Funds Make The Right Call On Virtu Financial Inc (VIRT) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Virtu Financial Inc (NASDAQ:VIRT) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Virtu Financial Inc (NASDAQ:VIRT) going to take off soon? Money managers were taking an optimistic view. The number of bullish hedge fund positions went up by 2 lately. Our calculations also showed that VIRT 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). VIRT was in 17 hedge funds’ portfolios at the end of March. There were 15 hedge funds in our database with VIRT positions at the end of the previous quarter.

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

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Chuck Royce

Chuck Royce of Royce & Associates

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now let’s view the latest hedge fund action regarding Virtu Financial Inc (NASDAQ:VIRT).

What have hedge funds been doing with Virtu Financial Inc (NASDAQ:VIRT)?

At Q1’s end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 13% from the previous quarter. The graph below displays the number of hedge funds with bullish position in VIRT over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

More specifically, Royce & Associates was the largest shareholder of Virtu Financial Inc (NASDAQ:VIRT), with a stake worth $26 million reported as of the end of September. Trailing Royce & Associates was Renaissance Technologies, which amassed a stake valued at $15.6 million. Winton Capital Management, Callodine Capital Management, and PEAK6 Capital Management 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 Callodine Capital Management allocated the biggest weight to Virtu Financial Inc (NASDAQ:VIRT), around 2.12% of its 13F portfolio. Cobalt Capital Management is also relatively very bullish on the stock, designating 1.43 percent of its 13F equity portfolio to VIRT.

As aggregate interest increased, key hedge funds were breaking ground themselves. Renaissance Technologies, initiated the most valuable position in Virtu Financial Inc (NASDAQ:VIRT). Renaissance Technologies had $15.6 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also initiated a $4.1 million position during the quarter. The other funds with new positions in the stock are Wayne Cooperman’s Cobalt Capital Management, Richard Driehaus’s Driehaus Capital, and Greg Eisner’s Engineers Gate Manager.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Virtu Financial Inc (NASDAQ:VIRT) but similarly valued. We will take a look at Herbalife Nutrition Ltd. (NYSE:HLF), IAA, Inc. (NYSE:IAA), Enphase Energy Inc (NASDAQ:ENPH), and CDK Global Inc (NASDAQ:CDK). All of these stocks’ market caps are closest to VIRT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HLF 31 2056361 -1
IAA 39 804594 2
ENPH 35 370199 -4
CDK 24 180742 -1
Average 32.25 852974 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.25 hedge funds with bullish positions and the average amount invested in these stocks was $853 million. That figure was $73 million in VIRT’s case. IAA, Inc. (NYSE:IAA) is the most popular stock in this table. On the other hand CDK Global Inc (NASDAQ:CDK) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks Virtu Financial Inc (NASDAQ:VIRT) is even less popular than CDK. Hedge funds dodged a bullet by taking a bearish stance towards VIRT. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 18.6% in 2020 through July 27th but managed to beat the market by 17.1 percentage points. Unfortunately VIRT wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); VIRT investors were disappointed as the stock returned 23.1% since Q1 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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