Hedge Funds Dropped The Ball On Allakos Inc. (ALLK)

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtAllakos Inc. (NASDAQ:ALLK) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is Allakos Inc. (NASDAQ:ALLK) the right pick for your portfolio? Hedge funds were taking a pessimistic view. The number of bullish hedge fund positions fell by 3 recently. Our calculations also showed that ALLK 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.

Felix Baker - Baker Bros.

Felix Baker of Baker Bros.

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 take a gander at the fresh hedge fund action surrounding Allakos Inc. (NASDAQ:ALLK).

Hedge fund activity in Allakos Inc. (NASDAQ:ALLK)

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 -20% from the fourth quarter of 2019. On the other hand, there were a total of 9 hedge funds with a bullish position in ALLK a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Redmile Group was the largest shareholder of Allakos Inc. (NASDAQ:ALLK), with a stake worth $132.4 million reported as of the end of September. Trailing Redmile Group was Baker Bros. Advisors, which amassed a stake valued at $32.7 million. Samsara BioCapital, Rock Springs Capital Management, and Cormorant Asset 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 Samsara BioCapital allocated the biggest weight to Allakos Inc. (NASDAQ:ALLK), around 6.94% of its 13F portfolio. Redmile Group is also relatively very bullish on the stock, dishing out 3.71 percent of its 13F equity portfolio to ALLK.

Due to the fact that Allakos Inc. (NASDAQ:ALLK) has faced a decline in interest from the entirety of the hedge funds we track, logic holds that there exists a select few hedgies that decided to sell off their positions entirely in the first quarter. Interestingly, Richard Driehaus’s Driehaus Capital cut the largest stake of the 750 funds followed by Insider Monkey, comprising about $7.1 million in stock. Renaissance Technologies, also dropped its stock, about $1.1 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 3 funds in the first quarter.

Let’s go over hedge fund activity in other stocks similar to Allakos Inc. (NASDAQ:ALLK). We will take a look at Cohen & Steers, Inc. (NYSE:CNS), Rapid7 Inc (NASDAQ:RPD), FGL Holdings (NYSE:FG), and Tenable Holdings, Inc. (NASDAQ:TENB). This group of stocks’ market values are closest to ALLK’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CNS 20 67034 4
RPD 16 146199 -7
FG 26 210333 9
TENB 24 236868 2
Average 21.5 165109 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $165 million. That figure was $207 million in ALLK’s case. FGL Holdings (NYSE:FG) is the most popular stock in this table. On the other hand Rapid7 Inc (NASDAQ:RPD) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Allakos Inc. (NASDAQ:ALLK) is even less popular than RPD. Hedge funds clearly dropped the ball on ALLK 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 ALLK as the stock returned 61.5% 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.