Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Tellurian Inc. (NASDAQ:TELL).
Is Tellurian Inc. (NASDAQ:TELL) the right investment to pursue these days? Money managers are taking a bullish view. The number of long hedge fund positions improved by 5 recently. Our calculations also showed that TELL isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). TELL was in 14 hedge funds’ portfolios at the end of September. There were 9 hedge funds in our database with TELL holdings at the end of the previous quarter.
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
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 glance at the recent hedge fund action regarding Tellurian Inc. (NASDAQ:TELL).
What does smart money think about Tellurian Inc. (NASDAQ:TELL)?
Heading into the fourth quarter of 2019, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of 56% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in TELL over the last 17 quarters. 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 Tellurian Inc. (NASDAQ:TELL) was held by Electron Capital Partners, which reported holding $30.5 million worth of stock at the end of September. It was followed by D E Shaw with a $6.4 million position. Other investors bullish on the company included Yaupon Capital, PEAK6 Capital Management, and DSAM Partners. In terms of the portfolio weights assigned to each position Electron Capital Partners allocated the biggest weight to Tellurian Inc. (NASDAQ:TELL), around 4.47% of its 13F portfolio. Yaupon Capital is also relatively very bullish on the stock, earmarking 3.38 percent of its 13F equity portfolio to TELL.
As aggregate interest increased, some big names were breaking ground themselves. PEAK6 Capital Management, managed by Matthew Hulsizer, created the biggest call position in Tellurian Inc. (NASDAQ:TELL). PEAK6 Capital Management had $2.9 million invested in the company at the end of the quarter. Guy Shahar’s DSAM Partners also made a $2.5 million investment in the stock during the quarter. The following funds were also among the new TELL investors: David Rosen’s Rubric Capital Management, Brian Olson, Baehyun Sung, and Jamie Waters’s Blackstart Capital, and Brandon Haley’s Holocene Advisors.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Tellurian Inc. (NASDAQ:TELL) but similarly valued. These stocks are Cambrex Corporation (NYSE:CBM), Kontoor Brands, Inc. (NYSE:KTB), Acushnet Holdings Corp. (NYSE:GOLF), and NeoGenomics, Inc. (NASDAQ:NEO). All of these stocks’ market caps match TELL’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $71 million. That figure was $53 million in TELL’s case. Kontoor Brands, Inc. (NYSE:KTB) is the most popular stock in this table. On the other hand Acushnet Holdings Corp. (NYSE:GOLF) is the least popular one with only 12 bullish hedge fund positions. Tellurian Inc. (NASDAQ:TELL) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately TELL wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); TELL investors were disappointed as the stock returned -12.4% during the first two months of the fourth quarter 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 in Q4.
Disclosure: None. This article was originally published at Insider Monkey.