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Hedge Funds Bailed Out of Momo Inc (MOMO) At The Wrong Time

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The fourth quarter of 2018 is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 7 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Momo Inc (NASDAQ:MOMO).

Momo Inc (NASDAQ:MOMO) was in 21 hedge funds’ portfolios at the end of December. MOMO has seen a decrease in hedge fund interest of late. There were 45 hedge funds in our database with MOMO holdings at the end of the previous quarter. Our calculations also showed that MOMO isn’t among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

D. E. Shaw

We’re going to take a gander at the latest hedge fund action regarding Momo Inc (NASDAQ:MOMO).

What have hedge funds been doing with Momo Inc (NASDAQ:MOMO)?

At Q4’s end, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -53% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards MOMO over the last 14 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

MOMO_apr2019

Among these funds, Renaissance Technologies held the most valuable stake in Momo Inc (NASDAQ:MOMO), which was worth $271.8 million at the end of the third quarter. On the second spot was GLG Partners which amassed $66.6 million worth of shares. Moreover, Arrowstreet Capital, Yiheng Capital, and Sylebra Capital Management were also bullish on Momo Inc (NASDAQ:MOMO), allocating a large percentage of their portfolios to this stock.

Judging by the fact that Momo Inc (NASDAQ:MOMO) has experienced falling interest from hedge fund managers, it’s easy to see that there exists a select few hedgies who were dropping their full holdings by the end of the third quarter. Intriguingly, Josh Resnick’s Jericho Capital Asset Management dropped the largest stake of the “upper crust” of funds watched by Insider Monkey, totaling about $222.6 million in stock, and Matthew Sidman’s Three Bays Capital was right behind this move, as the fund dumped about $55.7 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 24 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Momo Inc (NASDAQ:MOMO) but similarly valued. These stocks are JetBlue Airways Corporation (NASDAQ:JBLU), CAE, Inc. (NYSE:CAE), Virtu Financial Inc (NASDAQ:VIRT), and Elbit Systems Ltd. (NASDAQ:ESLT). This group of stocks’ market caps resemble MOMO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
JBLU 31 623972 1
CAE 9 84941 -1
VIRT 17 114979 3
ESLT 3 11299 1
Average 15 208798 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $209 million. That figure was $521 million in MOMO’s case. JetBlue Airways Corporation (NASDAQ:JBLU) is the most popular stock in this table. On the other hand Elbit Systems Ltd. (NASDAQ:ESLT) is the least popular one with only 3 bullish hedge fund positions. Momo Inc (NASDAQ:MOMO) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on MOMO as the stock returned 55% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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