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 returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% 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’ 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 New York Mortgage Trust, Inc. (NASDAQ:NYMT).
New York Mortgage Trust, Inc. (NASDAQ:NYMT) was in 9 hedge funds’ portfolios at the end of the fourth quarter of 2018. NYMT investors should pay attention to an increase in enthusiasm from smart money recently. There were 7 hedge funds in our database with NYMT holdings at the end of the previous quarter. Our calculations also showed that nymt 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.
Let’s check out the fresh hedge fund action encompassing New York Mortgage Trust, Inc. (NASDAQ:NYMT).
What does the smart money think about New York Mortgage Trust, Inc. (NASDAQ:NYMT)?
At the end of the fourth quarter, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of 29% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in NYMT 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.
More specifically, Renaissance Technologies was the largest shareholder of New York Mortgage Trust, Inc. (NASDAQ:NYMT), with a stake worth $2.2 million reported as of the end of December. Trailing Renaissance Technologies was Ellington, which amassed a stake valued at $0.6 million. D E Shaw, Winton Capital Management, and Element Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
As one would reasonably expect, some big names were breaking ground themselves. Ellington, managed by Mike Vranos, created the largest position in New York Mortgage Trust, Inc. (NASDAQ:NYMT). Ellington had $0.6 million invested in the company at the end of the quarter. D. E. Shaw’s D E Shaw also initiated a $0.4 million position during the quarter. The only other fund with a new position in the stock is John Overdeck and David Siegel’s Two Sigma Advisors.
Let’s now review hedge fund activity in other stocks similar to New York Mortgage Trust, Inc. (NASDAQ:NYMT). These stocks are NIC Inc. (NASDAQ:EGOV), InVitae Corporation (NYSE:NVTA), California Resources Corporation (NYSE:CRC), and Fate Therapeutics Inc (NASDAQ:FATE). All of these stocks’ market caps are similar to NYMT’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
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As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $165 million. That figure was $4 million in NYMT’s case. InVitae Corporation (NYSE:NVTA) is the most popular stock in this table. On the other hand Fate Therapeutics Inc (NASDAQ:FATE) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks New York Mortgage Trust, Inc. (NASDAQ:NYMT) is even less popular than FATE. Hedge funds dodged a bullet by taking a bearish stance towards NYMT. Our calculations showed that the top 15 most popular hedge fund stocks returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately NYMT wasn’t nearly as popular as these 15 stock (hedge fund sentiment was very bearish); NYMT investors were disappointed as the stock returned 8.7% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.