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 Arista Networks Inc (NYSE:ANET).
Arista Networks Inc (NYSE:ANET) investors should be aware of an increase in activity from the world’s largest hedge funds recently. ANET was in 28 hedge funds’ portfolios at the end of March. There were 23 hedge funds in our database with ANET holdings at the end of the previous quarter. Our calculations also showed that ANET isn’t among the 30 most popular stocks among hedge funds.
In the eyes of most investors, hedge funds are viewed as underperforming, old investment vehicles of yesteryear. While there are greater than 8000 funds with their doors open at the moment, We choose to focus on the leaders of this group, about 750 funds. It is estimated that this group of investors preside over most of all hedge funds’ total capital, and by keeping track of their best equity investments, Insider Monkey has formulated a few investment strategies that have historically outperformed the market. Insider Monkey’s flagship hedge fund strategy outperformed the S&P 500 index by around 5 percentage points per year since its inception in May 2014 through the end of May. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 30.9% since February 2017 (through May 30th) even though the market was up nearly 24% during the same period. We just shared a list of 5 short targets in our latest quarterly update and they are already down an average of 11.9% in less than a couple of weeks whereas our long picks outperformed the market by 2 percentage points in this volatile 2 week period.
Let’s analyze the latest hedge fund action surrounding Arista Networks Inc (NYSE:ANET).
How are hedge funds trading Arista Networks Inc (NYSE:ANET)?
At Q1’s end, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 22% from the fourth quarter of 2018. By comparison, 28 hedge funds held shares or bullish call options in ANET a year ago. With the smart money’s capital changing hands, there exists a few key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Arista Networks Inc (NYSE:ANET), which was worth $135.3 million at the end of the first quarter. On the second spot was Polar Capital which amassed $106.6 million worth of shares. Moreover, Citadel Investment Group, Hitchwood Capital Management, and Citadel Investment Group were also bullish on Arista Networks Inc (NYSE:ANET), allocating a large percentage of their portfolios to this stock.
As industrywide interest jumped, key hedge funds have been driving this bullishness. Hitchwood Capital Management, managed by James Crichton, assembled the most valuable position in Arista Networks Inc (NYSE:ANET). Hitchwood Capital Management had $66 million invested in the company at the end of the quarter. Josh Resnick’s Jericho Capital Asset Management also initiated a $60.1 million position during the quarter. The other funds with brand new ANET positions are Brandon Haley’s Holocene Advisors, Jeff Lignelli’s Incline Global Management, and Tor Minesuk’s Mondrian Capital.
Let’s go over hedge fund activity in other stocks similar to Arista Networks Inc (NYSE:ANET). We will take a look at T. Rowe Price Group, Inc. (NASDAQ:TROW), PACCAR Inc (NASDAQ:PCAR), Waste Connections, Inc. (NYSE:WCN), and Discover Financial Services (NYSE:DFS). All of these stocks’ market caps match ANET’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TROW | 26 | 519659 | 4 |
| PCAR | 23 | 94730 | 4 |
| WCN | 26 | 545837 | -2 |
| DFS | 36 | 742031 | -1 |
| Average | 27.75 | 475564 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.75 hedge funds with bullish positions and the average amount invested in these stocks was $476 million. That figure was $715 million in ANET’s case. Discover Financial Services (NYSE:DFS) is the most popular stock in this table. On the other hand PACCAR Inc (NASDAQ:PCAR) is the least popular one with only 23 bullish hedge fund positions. Arista Networks Inc (NYSE:ANET) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately ANET wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ANET were disappointed as the stock returned -21.1% during the same period 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
