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 General American Investors Company, Inc. (NYSE:GAM).
General American Investors Company, Inc. (NYSE:GAM) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 5 hedge funds’ portfolios at the end of the third quarter of 2019. At the end of this article we will also compare GAM to other stocks including Model N Inc (NYSE:MODN), Franklin Street Properties Corp. (NYSE:FSP), and Standex International Corporation (NYSE:SXI) to get a better sense of its popularity.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to take a look at the fresh hedge fund action encompassing General American Investors Company, Inc. (NYSE:GAM).
How have hedgies been trading General American Investors Company, Inc. (NYSE:GAM)?
At Q3’s end, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in GAM over the last 17 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey’s hedge fund database, Saba Capital, managed by Boaz Weinstein, holds the biggest position in General American Investors Company, Inc. (NYSE:GAM). Saba Capital has a $15.9 million position in the stock, comprising 0.7% of its 13F portfolio. Coming in second is Bulldog Investors, managed by Phillip Goldstein, Andrew Dakos and Steven Samuels, which holds a $10.6 million position; the fund has 4.7% of its 13F portfolio invested in the stock. Remaining peers with similar optimism include John A. Levin’s Levin Capital Strategies, Gregory Fraser, Rudolph Kluiber, and Timothy Krochuk’s GRT Capital Partners and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Bulldog Investors allocated the biggest weight to General American Investors Company, Inc. (NYSE:GAM), around 4.74% of its 13F portfolio. Saba Capital is also relatively very bullish on the stock, setting aside 0.74 percent of its 13F equity portfolio to GAM.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Almitas Capital. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Millennium Management).
Let’s also examine hedge fund activity in other stocks similar to General American Investors Company, Inc. (NYSE:GAM). These stocks are Model N Inc (NYSE:MODN), Franklin Street Properties Corp. (NYSE:FSP), Standex International Corporation (NYSE:SXI), and Sunnova Energy International Inc. (NYSE:NOVA). This group of stocks’ market values resemble GAM’s market value.
|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 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $75 million. That figure was $28 million in GAM’s case. Model N Inc (NYSE:MODN) is the most popular stock in this table. On the other hand Franklin Street Properties Corp. (NYSE:FSP) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks General American Investors Company, Inc. (NYSE:GAM) is even less popular than FSP. Hedge funds dodged a bullet by taking a bearish stance towards GAM. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately GAM wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); GAM investors were disappointed as the stock returned 2.4% 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.