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 returned approximately 12.1% in the first 5 months of this year through May 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month 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’ 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 DowDuPont Inc. (NYSE:DWDP).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
We’re going to view the recent hedge fund action regarding DowDuPont Inc. (NYSE:DWDP).
What does the smart money think about DowDuPont Inc. (NYSE:DWDP)?
At the end of the first quarter, a total of 61 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards DWDP over the last 15 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
Among these funds, Third Point held the most valuable stake in DowDuPont Inc. (NYSE:DWDP), which was worth $466.2 million at the end of the first quarter. On the second spot was Adage Capital Management which amassed $368.5 million worth of shares. Moreover, OZ Management, Maverick Capital, and Citadel Investment Group were also bullish on DowDuPont Inc. (NYSE:DWDP), allocating a large percentage of their portfolios to this stock.
Judging by the fact that DowDuPont Inc. (NYSE:DWDP) has faced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there was a specific group of funds who sold off their full holdings by the end of the third quarter. At the top of the heap, Larry Robbins’s Glenview Capital cut the largest stake of all the hedgies watched by Insider Monkey, valued at an estimated $460.8 million in stock. Daniel S. Och’s fund, OZ Management, also dumped its stock, about $377.1 million worth. These moves are interesting, as total hedge fund interest dropped by 6 funds by the end of the third quarter.
Let’s now review hedge fund activity in other stocks similar to DowDuPont Inc. (NYSE:DWDP). These stocks are PetroChina Company Limited (NYSE:PTR), 3M Company (NYSE:MMM), AbbVie Inc (NYSE:ABBV), and Broadcom Inc (NASDAQ:AVGO). This group of stocks’ market valuations match DWDP’s market valuation.
|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 38.75 hedge funds with bullish positions and the average amount invested in these stocks was $1938 million. That figure was $1910 million in DWDP’s case. Broadcom Inc (NASDAQ:AVGO) is the most popular stock in this table. On the other hand PetroChina Company Limited (NYSE:PTR) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks DowDuPont Inc. (NYSE:DWDP) is more popular among hedge funds. 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 DWDP wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on DWDP were disappointed as the stock returned -12.4% 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 in Q2.
Disclosure: None. This article was originally published at Insider Monkey.