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Hedge Funds Are Souring On Virtu Financial Inc (VIRT)

“The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak,” are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Virtu Financial Inc (NASDAQ:VIRT) and see how it was affected.

Virtu Financial Inc (NASDAQ:VIRT) shareholders have witnessed a decrease in hedge fund sentiment of late. VIRT was in 13 hedge funds’ portfolios at the end of September. There were 16 hedge funds in our database with VIRT holdings at the end of the previous quarter. Our calculations also showed that VIRT isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

David Harding

David Harding of Winton Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the latest hedge fund action encompassing Virtu Financial Inc (NASDAQ:VIRT).

How have hedgies been trading Virtu Financial Inc (NASDAQ:VIRT)?

At the end of the third quarter, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards VIRT over the last 17 quarters. With hedgies’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

More specifically, Royce & Associates was the largest shareholder of Virtu Financial Inc (NASDAQ:VIRT), with a stake worth $55.2 million reported as of the end of September. Trailing Royce & Associates was Citadel Investment Group, which amassed a stake valued at $11.6 million. Point72 Asset Management, Strycker View Capital, and Winton 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 Strycker View Capital allocated the biggest weight to Virtu Financial Inc (NASDAQ:VIRT), around 2.02% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, earmarking 0.51 percent of its 13F equity portfolio to VIRT.

Seeing as Virtu Financial Inc (NASDAQ:VIRT) has faced bearish sentiment from the aggregate hedge fund industry, logic holds that there were a few hedge funds that decided to sell off their full holdings in the third quarter. Intriguingly, Renaissance Technologies dumped the biggest investment of the 750 funds monitored by Insider Monkey, comprising about $10.1 million in stock, and Peter Seuss’s Prana Capital Management was right behind this move, as the fund dumped about $8.2 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 3 funds in the third quarter.

Let’s check out hedge fund activity in other stocks similar to Virtu Financial Inc (NASDAQ:VIRT). We will take a look at TreeHouse Foods Inc. (NYSE:THS), Kennedy-Wilson Holdings Inc (NYSE:KW), Thor Industries, Inc. (NYSE:THO), and Cirrus Logic, Inc. (NASDAQ:CRUS). All of these stocks’ market caps resemble VIRT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
THS 18 241573 1
KW 18 499215 5
THO 24 222357 5
CRUS 24 373257 1
Average 21 334101 3

View table here if you experience formatting issues.

As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $334 million. That figure was $90 million in VIRT’s case. Thor Industries, Inc. (NYSE:THO) is the most popular stock in this table. On the other hand TreeHouse Foods Inc. (NYSE:THS) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Virtu Financial Inc (NASDAQ:VIRT) is even less popular than THS. Hedge funds dodged a bullet by taking a bearish stance towards VIRT. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately VIRT wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); VIRT investors were disappointed as the stock returned 3% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.

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

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