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Do Hedge Funds Love Ecopetrol S.A. (EC)?

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 Ecopetrol S.A. (NYSE:EC) and determine whether hedge funds skillfully traded this stock.

Is Ecopetrol S.A. (NYSE:EC) undervalued? The best stock pickers were betting on the stock. The number of bullish hedge fund bets inched up by 1 lately. Our calculations also showed that EC 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.

Jonathan Barrett Luminus Management

Jonathan Barrett of Luminus Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s view the latest hedge fund action encompassing Ecopetrol S.A. (NYSE:EC).

What does smart money think about Ecopetrol S.A. (NYSE:EC)?

At the end of the first quarter, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 9% from one quarter earlier. By comparison, 15 hedge funds held shares or bullish call options in EC 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.

The largest stake in Ecopetrol S.A. (NYSE:EC) was held by Renaissance Technologies, which reported holding $80.5 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $16.5 million position. Other investors bullish on the company included Luminus Management, Two Sigma Advisors, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Luminus Management allocated the biggest weight to Ecopetrol S.A. (NYSE:EC), around 0.67% of its 13F portfolio. Quantamental Technologies is also relatively very bullish on the stock, setting aside 0.42 percent of its 13F equity portfolio to EC.

As industrywide interest jumped, key money managers were leading the bulls’ herd. Luminus Management, managed by Jonathan Barrett and Paul Segal, created the largest position in Ecopetrol S.A. (NYSE:EC). Luminus Management had $6.5 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also made a $1 million investment in the stock during the quarter. The other funds with new positions in the stock are Ran Pang’s Quantamental Technologies, Paul Marshall and Ian Wace’s Marshall Wace LLP, and Dmitry Balyasny’s Balyasny Asset Management.

Let’s now review hedge fund activity in other stocks similar to Ecopetrol S.A. (NYSE:EC). We will take a look at Liberty Broadband Corp (NASDAQ:LBRDA), Nutrien Ltd. (NYSE:NTR), Xilinx, Inc. (NASDAQ:XLNX), and Synopsys, Inc. (NASDAQ:SNPS). All of these stocks’ market caps match EC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LBRDA 26 655556 2
NTR 22 269579 -6
XLNX 38 635591 -4
SNPS 31 725655 -14
Average 29.25 571595 -5.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $572 million. That figure was $108 million in EC’s case. Xilinx, Inc. (NASDAQ:XLNX) is the most popular stock in this table. On the other hand Nutrien Ltd. (NYSE:NTR) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Ecopetrol S.A. (NYSE:EC) is even less popular than NTR. Hedge funds clearly dropped the ball on EC 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 EC as the stock returned 27.8% 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.