Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example in the first 2.5 months of this year the Standard and Poor’s 500 Index returned approximately 13.1% (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. Interestingly, an average long/short hedge fund returned only 5% due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns (5%) versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like HDFC Bank Limited (NYSE:HDB).
HDFC Bank Limited (NYSE:HDB) investors should be aware of an increase in support from the world’s most elite money managers recently. HDB was in 28 hedge funds’ portfolios at the end of December. There were 27 hedge funds in our database with HDB holdings at the end of the previous quarter. Our calculations also showed that HDB 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.
We’re going to analyze the recent hedge fund action encompassing HDFC Bank Limited (NYSE:HDB).
Hedge fund activity in HDFC Bank Limited (NYSE:HDB)
At Q4’s end, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 4% from the second quarter of 2018. By comparison, 23 hedge funds held shares or bullish call options in HDB a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Fisher Asset Management, managed by Ken Fisher, holds the biggest position in HDFC Bank Limited (NYSE:HDB). Fisher Asset Management has a $458.2 million position in the stock, comprising 0.6% of its 13F portfolio. Coming in second is Ryan Pedlow of Two Creeks Capital Management, with a $107.2 million position; the fund has 7.3% of its 13F portfolio invested in the stock. Other peers with similar optimism contain D. E. Shaw’s D E Shaw, Richard Driehaus’s Driehaus Capital and David Kowitz and Sheldon Kasowitz’s Indus Capital.
As industrywide interest jumped, specific money managers have been driving this bullishness. Castle Hook Partners, managed by Josh Donfeld and David Rogers, created the biggest position in HDFC Bank Limited (NYSE:HDB). Castle Hook Partners had $34 million invested in the company at the end of the quarter. Jasjit Rekhi’s Sanoor Capital also made a $14.6 million investment in the stock during the quarter. The following funds were also among the new HDB investors: Charles Clough’s Clough Capital Partners, Paul Marshall and Ian Wace’s Marshall Wace LLP, and Michael Gelband’s ExodusPoint Capital.
Let’s go over hedge fund activity in other stocks similar to HDFC Bank Limited (NYSE:HDB). These stocks are Altria Group Inc (NYSE:MO), United Technologies Corporation (NYSE:UTX), Toronto-Dominion Bank (NYSE:TD), and Texas Instruments Incorporated (NASDAQ:TXN). This group of stocks’ market valuations match HDB’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MO | 41 | 915494 | 0 |
| UTX | 64 | 5060168 | 5 |
| TD | 17 | 887418 | -3 |
| TXN | 44 | 2402004 | -4 |
| Average | 41.5 | 2316271 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 41.5 hedge funds with bullish positions and the average amount invested in these stocks was $2316 million. That figure was $986 million in HDB’s case. United Technologies Corporation (NYSE:UTX) is the most popular stock in this table. On the other hand Toronto-Dominion Bank (NYSE:TD) is the least popular one with only 17 bullish hedge fund positions. HDFC Bank Limited (NYSE:HDB) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 HDB wasn’t in this group. Hedge funds that bet on HDB were disappointed as the stock returned 8.1% and underperformed the market. 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.
