Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards The AES Corporation (NYSE:AES).
Is The AES Corporation (NYSE:AES) a buy here? Prominent investors are taking a bearish view. The number of bullish hedge fund positions fell by 3 lately. Our calculations also showed that AES 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.
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. Let’s check out the latest hedge fund action surrounding The AES Corporation (NYSE:AES).
How are hedge funds trading The AES Corporation (NYSE:AES)?
At the end of the third quarter, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from one quarter earlier. By comparison, 21 hedge funds held shares or bullish call options in AES a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in The AES Corporation (NYSE:AES) was held by Renaissance Technologies, which reported holding $174.7 million worth of stock at the end of September. It was followed by AQR Capital Management with a $72.9 million position. Other investors bullish on the company included ValueAct Capital, Two Sigma Advisors, and GLG Partners. In terms of the portfolio weights assigned to each position Axel Capital Management allocated the biggest weight to The AES Corporation (NYSE:AES), around 5.78% of its portfolio. Blackstart Capital is also relatively very bullish on the stock, setting aside 4.58 percent of its 13F equity portfolio to AES.
Because The AES Corporation (NYSE:AES) has experienced declining sentiment from the smart money, we can see that there exists a select few fund managers who were dropping their full holdings by the end of the third quarter. At the top of the heap, Ken Griffin’s Citadel Investment Group said goodbye to the largest investment of all the hedgies followed by Insider Monkey, comprising close to $8.2 million in stock, and Matthew Drapkin and Steven R. Becker’s Becker Drapkin Management was right behind this move, as the fund cut about $4.3 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 3 funds by the end of the third quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as The AES Corporation (NYSE:AES) but similarly valued. We will take a look at Everest Re Group Ltd (NYSE:RE), Varian Medical Systems, Inc. (NYSE:VAR), Tractor Supply Company (NASDAQ:TSCO), and TechnipFMC plc (NYSE:FTI). This group of stocks’ market values match AES’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 28.75 hedge funds with bullish positions and the average amount invested in these stocks was $614 million. That figure was $441 million in AES’s case. Tractor Supply Company (NASDAQ:TSCO) is the most popular stock in this table. On the other hand Everest Re Group Ltd (NYSE:RE) is the least popular one with only 21 bullish hedge fund positions. The AES Corporation (NYSE:AES) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on AES as the stock returned 16.7% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.