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 5 months of this year through May 30th the Standard and Poor’s 500 Index returned approximately 12.1% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns 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 Pivotal Software, Inc. (NYSE:PVTL).
In the 21st century investor’s toolkit there are a lot of signals investors put to use to appraise their holdings. Some of the less known signals are hedge fund and insider trading signals. Our researchers have shown that, historically, those who follow the top picks of the elite investment managers can beat the market by a healthy amount (see the details here).
Let’s go over the recent hedge fund action surrounding Pivotal Software, Inc. (NYSE:PVTL).
What does the smart money think about Pivotal Software, Inc. (NYSE:PVTL)?
At the end of the first quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -22% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in PVTL over the last 15 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Pivotal Software, Inc. (NYSE:PVTL) was held by Steadfast Capital Management, which reported holding $97.1 million worth of stock at the end of March. It was followed by SQN Investors with a $70.7 million position. Other investors bullish on the company included Citadel Investment Group, Alkeon Capital Management, and Highline Capital Management.
Because Pivotal Software, Inc. (NYSE:PVTL) has experienced declining sentiment from the smart money, it’s safe to say that there is a sect of hedge funds that elected to cut their full holdings last quarter. Intriguingly, Jeffrey Talpins’s Element Capital Management dumped the biggest position of the “upper crust” of funds watched by Insider Monkey, comprising an estimated $29.5 million in stock, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund dropped about $23.7 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 7 funds last quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Pivotal Software, Inc. (NYSE:PVTL) but similarly valued. We will take a look at Synovus Financial Corp. (NYSE:SNV), Ternium S.A. (NYSE:TX), Compania Cervecerias Unidas S.A. (NYSE:CCU), and Cypress Semiconductor Corporation (NASDAQ:CY). This group of stocks’ market valuations match PVTL’s market valuation.
|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 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $304 million. That figure was $472 million in PVTL’s case. Synovus Financial Corp. (NYSE:SNV) is the most popular stock in this table. On the other hand Compania Cervecerias Unidas S.A. (NYSE:CCU) is the least popular one with only 11 bullish hedge fund positions. Pivotal Software, Inc. (NYSE:PVTL) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on PVTL as the stock returned 2.8% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.