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 Pennsylvania Real Estate Investment Trust (NYSE:PEI).
Pennsylvania Real Estate Investment Trust (NYSE:PEI) investors should pay attention to a decrease in activity from the world’s largest hedge funds in recent months. Our calculations also showed that PEI 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.
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 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.
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. Keeping this in mind let’s take a glance at the new hedge fund action encompassing Pennsylvania Real Estate Investment Trust (NYSE:PEI).
How have hedgies been trading Pennsylvania Real Estate Investment Trust (NYSE:PEI)?
At Q3’s end, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the previous quarter. The graph below displays the number of hedge funds with bullish position in PEI over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, ZWEIG DIMENNA PARTNERS held the most valuable stake in Pennsylvania Real Estate Investment Trust (NYSE:PEI), which was worth $5.6 million at the end of the third quarter. On the second spot was Millennium Management which amassed $2 million worth of shares. ExodusPoint Capital, Citadel Investment Group, and Paloma Partners 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 ZWEIG DIMENNA PARTNERS allocated the biggest weight to Pennsylvania Real Estate Investment Trust (NYSE:PEI), around 0.5% of its 13F portfolio. ExodusPoint Capital is also relatively very bullish on the stock, setting aside 0.03 percent of its 13F equity portfolio to PEI.
Judging by the fact that Pennsylvania Real Estate Investment Trust (NYSE:PEI) has faced declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there exists a select few money managers that slashed their full holdings in the third quarter. It’s worth mentioning that John Overdeck and David Siegel’s Two Sigma Advisors sold off the largest stake of all the hedgies watched by Insider Monkey, valued at about $1.7 million in stock. Steve Cohen’s fund, Point72 Asset Management, also dropped its stock, about $0.8 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 1 funds in the third quarter.
Let’s now take a look at hedge fund activity in other stocks similar to Pennsylvania Real Estate Investment Trust (NYSE:PEI). These stocks are Vishay Precision Group Inc (NYSE:VPG), Sentinel Energy Services Inc. (NASDAQ:STNL), Franklin Financial Network Inc (NYSE:FSB), and The Manitowoc Company, Inc. (NYSE:MTW). This group of stocks’ market values are similar to PEI’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 hedge funds with bullish positions and the average amount invested in these stocks was $89 million. That figure was $9 million in PEI’s case. Vishay Precision Group Inc (NYSE:VPG) is the most popular stock in this table. On the other hand Franklin Financial Network Inc (NYSE:FSB) is the least popular one with only 3 bullish hedge fund positions. Pennsylvania Real Estate Investment Trust (NYSE:PEI) 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 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 PEI wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); PEI investors were disappointed as the stock returned 4.4% during the first two months of the fourth quarter 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 in Q4.
Disclosure: None. This article was originally published at Insider Monkey.