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 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% 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 One Madison Corporation (NYSE:OMAD).
One Madison Corporation (NYSE:OMAD) was in 11 hedge funds’ portfolios at the end of December. OMAD shareholders have witnessed a decrease in activity from the world’s largest hedge funds lately. There were 14 hedge funds in our database with OMAD positions at the end of the previous quarter. Our calculations also showed that OMAD isn’t among the 30 most popular stocks among hedge funds.
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 32 percentage points since May 2014 through March 12, 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.
Let’s take a look at the key hedge fund action regarding One Madison Corporation (NYSE:OMAD).
What have hedge funds been doing with One Madison Corporation (NYSE:OMAD)?
Heading into the first quarter of 2019, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -21% from one quarter earlier. By comparison, 11 hedge funds held shares or bullish call options in OMAD a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Weiss Asset Management was the largest shareholder of One Madison Corporation (NYSE:OMAD), with a stake worth $21 million reported as of the end of December. Trailing Weiss Asset Management was Alyeska Investment Group, which amassed a stake valued at $9.3 million. HBK Investments, Marshall Wace LLP, and Glazer Capital were also very fond of the stock, giving the stock large weights in their portfolios.
Because One Madison Corporation (NYSE:OMAD) has experienced a decline in interest from hedge fund managers, we can see that there exists a select few fund managers that elected to cut their full holdings heading into Q3. It’s worth mentioning that Jamie Mendola’s Pacific Grove Capital said goodbye to the biggest investment of the 700 funds monitored by Insider Monkey, totaling an estimated $4.5 million in stock, and John Thiessen’s Vertex One Asset Management was right behind this move, as the fund dropped about $1.8 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 3 funds heading into Q3.
Let’s now take a look at hedge fund activity in other stocks similar to One Madison Corporation (NYSE:OMAD). We will take a look at Ducommun Incorporated (NYSE:DCO), Evelo Biosciences, Inc. (NASDAQ:EVLO), Prothena Corporation plc (NASDAQ:PRTA), and Kimbell Royalty Partners, LP (NYSE:KRP). This group of stocks’ market caps resemble OMAD’s market cap.
|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 8.25 hedge funds with bullish positions and the average amount invested in these stocks was $69 million. That figure was $56 million in OMAD’s case. Prothena Corporation plc (NASDAQ:PRTA) is the most popular stock in this table. On the other hand Evelo Biosciences, Inc. (NASDAQ:EVLO) is the least popular one with only 3 bullish hedge fund positions. One Madison Corporation (NYSE:OMAD) 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 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately OMAD wasn’t nearly as popular as these 15 stock and hedge funds that were betting on OMAD were disappointed as the stock returned 2.3% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.