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 The Hanover Insurance Group, Inc. (NYSE:THG).
The Hanover Insurance Group, Inc. (NYSE:THG) was in 25 hedge funds’ portfolios at the end of September. THG investors should be aware of an increase in support from the world’s most elite money managers in recent months. There were 20 hedge funds in our database with THG positions at the end of the previous quarter. Our calculations also showed that THG isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to check out the new hedge fund action encompassing The Hanover Insurance Group, Inc. (NYSE:THG).
How have hedgies been trading The Hanover Insurance Group, Inc. (NYSE:THG)?
Heading into the fourth quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 25% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in THG over the last 17 quarters. With hedge funds’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
Among these funds, AQR Capital Management held the most valuable stake in The Hanover Insurance Group, Inc. (NYSE:THG), which was worth $56.5 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $33.3 million worth of shares. Millennium Management, Two Sigma Advisors, and Pzena Investment 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 Prospector Partners allocated the biggest weight to The Hanover Insurance Group, Inc. (NYSE:THG), around 2.44% of its portfolio. Gillson Capital is also relatively very bullish on the stock, setting aside 1.99 percent of its 13F equity portfolio to THG.
With a general bullishness amongst the heavyweights, some big names were leading the bulls’ herd. Laurion Capital Management, managed by Benjamin A. Smith, established the biggest position in The Hanover Insurance Group, Inc. (NYSE:THG). Laurion Capital Management had $1.5 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $0.9 million position during the quarter. The other funds with brand new THG positions are Bruce Kovner’s Caxton Associates, Michael Platt and William Reeves’s BlueCrest Capital Mgmt., and Paul Marshall and Ian Wace’s Marshall Wace.
Let’s also examine hedge fund activity in other stocks similar to The Hanover Insurance Group, Inc. (NYSE:THG). We will take a look at Exelixis, Inc. (NASDAQ:EXEL), Planet Fitness Inc (NYSE:PLNT), Gerdau SA (NYSE:GGB), and Huntsman Corporation (NYSE:HUN). This group of stocks’ market valuations match THG’s market valuation.
|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 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $424 million. That figure was $272 million in THG’s case. Planet Fitness Inc (NYSE:PLNT) is the most popular stock in this table. On the other hand Gerdau SA (NYSE:GGB) is the least popular one with only 9 bullish hedge fund positions. The Hanover Insurance Group, Inc. (NYSE:THG) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 THG wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on THG were disappointed as the stock returned 0.3% during the fourth quarter (through the end of November) 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.