Looking for high-potential stocks? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 7.6% in the 12 months ending November 21, with more than 51% of the stocks in the index failing to beat the benchmark. Therefore, the odds that one will pin down a winner by randomly picking a stock are less than the odds in a fair coin-tossing game. Conversely, best performing hedge funds’ 30 preferred mid-cap stocks generated a return of 18% during the same 12-month period. Coincidence? It might happen to be so, but it is unlikely. Our research covering a 17-year period indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Fifth Street Finance Corp. (NASDAQ:FSC).
Hedge fund interest in Fifth Street Finance Corp. (NASDAQ:FSC) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Southside Bancshares, Inc. (NASDAQ:SBSI), State Bank Financial Corp (NASDAQ:STBZ), and Vascular Solutions, Inc. (NASDAQ:VASC) to gather more data points.
At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.
Keeping this in mind, let’s analyze the new action regarding Fifth Street Finance Corp. (NASDAQ:FSC).
How have hedgies been trading Fifth Street Finance Corp. (NASDAQ:FSC)?
At the end of the third quarter, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, unchanged from one quarter earlier. On the other hand, there were a total of 11 hedge funds with a bullish position in FSC at the beginning of this year. With hedgies’ sentiment swirling, there exists a select group of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Mangrove Partners, led by Nathaniel August, holds the biggest position in Fifth Street Finance Corp. (NASDAQ:FSC). According to regulatory filings, the fund has a $6.8 million position in the stock, comprising 1.6% of its 13F portfolio. Coming in second is Millennium Management, one of the largest hedge funds in the world, holding a $4.4 million position; less than 0.1% of its 13F portfolio is allocated to the company. Remaining members of the smart money that are bullish contain Chuck Royce’s Royce & Associates, D. E. Shaw’s D E Shaw and James Dondero’s Highland Capital Management. We should note that Mangrove Partners is among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.