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 FTI Consulting, Inc. (NYSE:FCN).
Is FTI Consulting, Inc. (NYSE:FCN) going to take off soon? Hedge funds are becoming more confident. The number of long hedge fund positions moved up by 1 in recent months. Our calculations also showed that FCN isn’t among the 30 most popular stocks among hedge funds. FCN was in 17 hedge funds’ portfolios at the end of the first quarter of 2019. There were 16 hedge funds in our database with FCN holdings at the end of the previous quarter.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Martin Whitman of Third Avenue Management
We’re going to go over the latest hedge fund action encompassing FTI Consulting, Inc. (NYSE:FCN).
How have hedgies been trading FTI Consulting, Inc. (NYSE:FCN)?
At Q1’s end, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards FCN 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.
Among these funds, Greenvale Capital held the most valuable stake in FTI Consulting, Inc. (NYSE:FCN), which was worth $36.5 million at the end of the first quarter. On the second spot was GLG Partners which amassed $22.6 million worth of shares. Moreover, Gotham Asset Management, Third Avenue Management, and AQR Capital Management were also bullish on FTI Consulting, Inc. (NYSE:FCN), allocating a large percentage of their portfolios to this stock.
Now, key money managers were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the most valuable position in FTI Consulting, Inc. (NYSE:FCN). Arrowstreet Capital had $8.4 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also made a $5.6 million investment in the stock during the quarter. The other funds with brand new FCN positions are Richard Driehaus’s Driehaus Capital and Chuck Royce’s Royce & Associates.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as FTI Consulting, Inc. (NYSE:FCN) but similarly valued. We will take a look at Steven Madden, Ltd. (NASDAQ:SHOO), Dorman Products Inc. (NASDAQ:DORM), Cleveland-Cliffs Inc (NYSE:CLF), and NuStar Energy L.P. (NYSE:NS). This group of stocks’ market valuations match FCN’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SHOO | 18 | 62053 | 0 |
| DORM | 15 | 72393 | 3 |
| CLF | 35 | 464839 | 6 |
| NS | 1 | 1376 | -1 |
| Average | 17.25 | 150165 | 2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $150 million. That figure was $135 million in FCN’s case. Cleveland-Cliffs Inc (NYSE:CLF) is the most popular stock in this table. On the other hand NuStar Energy L.P. (NYSE:NS) is the least popular one with only 1 bullish hedge fund positions. FTI Consulting, Inc. (NYSE:FCN) 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on FCN as the stock returned 10.6% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
