Hedge Funds Flocked Into Red Hat, Inc. (RHT) Ahead of Its Merger With IBM

With the fourth-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the first quarter. One of these stocks was Red Hat, Inc. (NYSE:RHT).

Red Hat, Inc. (NYSE:RHT) was in 65 hedge funds’ portfolios at the end of the fourth quarter of 2018. RHT has experienced an increase in support from the world’s most elite money managers recently. There were 21 hedge funds in our database with RHT holdings at the end of the previous quarter. Our calculations also showed that RHT isn’t among the 30 most popular stocks among hedge funds.

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 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.

Clint Carlson, Carlson Capital

We’re going to take a look at the key hedge fund action regarding Red Hat, Inc. (NYSE:RHT).

Hedge fund activity in Red Hat, Inc. (NYSE:RHT)

Heading into the first quarter of 2019, a total of 65 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 210% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards RHT over the last 14 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.


Among these funds, Berkshire Hathaway held the most valuable stake in Red Hat, Inc. (NYSE:RHT), which was worth $733.4 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $338 million worth of shares. Moreover, Carlson Capital, Millennium Management, and Pentwater Capital Management were also bullish on Red Hat, Inc. (NYSE:RHT), allocating a large percentage of their portfolios to this stock.

With a general bullishness amongst the heavyweights, some big names were leading the bulls’ herd. Berkshire Hathaway, managed by Warren Buffett, created the most outsized position in Red Hat, Inc. (NYSE:RHT). Berkshire Hathaway had $733.4 million invested in the company at the end of the quarter. Clint Carlson’s Carlson Capital also made a $333.6 million investment in the stock during the quarter. The other funds with brand new RHT positions are Matthew Halbower’s Pentwater Capital Management, Alec Litowitz and Ross Laser’s Magnetar Capital, and Carl Tiedemann and Michael Tiedemann’s TIG Advisors.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Red Hat, Inc. (NYSE:RHT) but similarly valued. These stocks are NetEase, Inc (NASDAQ:NTES), Ross Stores, Inc. (NASDAQ:ROST), Constellation Brands, Inc. (NYSE:STZ), and Ford Motor Company (NYSE:F). This group of stocks’ market valuations are similar to RHT’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NTES 27 3285099 1
ROST 33 907243 2
STZ 62 4360416 1
F 33 977186 3
Average 38.75 2382486 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 38.75 hedge funds with bullish positions and the average amount invested in these stocks was $2382 million. That figure was $4019 million in RHT’s case. Constellation Brands, Inc. (NYSE:STZ) is the most popular stock in this table. On the other hand NetEase, Inc (NASDAQ:NTES) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Red Hat, Inc. (NYSE:RHT) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately RHT wasn’t in this group. Hedge funds that bet on RHT were content as the stock returned 3.5% and underperformed short-term interest rates. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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