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).
The AES Corporation (NYSE:AES) shareholders have witnessed a decrease in hedge fund sentiment lately. AES was in 24 hedge funds’ portfolios at the end of March. There were 29 hedge funds in our database with AES holdings at the end of the previous quarter. Our calculations also showed that AES isn’t among the 30 most popular stocks among hedge funds.
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 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.
We’re going to take a look at the fresh hedge fund action regarding The AES Corporation (NYSE:AES).
What have hedge funds been doing with The AES Corporation (NYSE:AES)?
At the end of the first quarter, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the fourth quarter of 2018. By comparison, 22 hedge funds held shares or bullish call options in AES 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, AQR Capital Management was the largest shareholder of The AES Corporation (NYSE:AES), with a stake worth $191.2 million reported as of the end of March. Trailing AQR Capital Management was Renaissance Technologies, which amassed a stake valued at $112.3 million. Adage Capital Management, Two Sigma Advisors, and ValueAct Capital were also very fond of the stock, giving the stock large weights in their portfolios.
Because The AES Corporation (NYSE:AES) has experienced declining sentiment from the aggregate hedge fund industry, we can see that there lies a certain “tier” of funds that decided to sell off their entire stakes heading into Q3. Intriguingly, Matthew Tewksbury’s Stevens Capital Management sold off the biggest investment of the “upper crust” of funds monitored by Insider Monkey, worth an estimated $7.9 million in stock, and Peter J. Hark’s Shelter Harbor Advisors was right behind this move, as the fund dumped about $3.6 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 5 funds heading into Q3.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as The AES Corporation (NYSE:AES) but similarly valued. These stocks are Wabtec Corporation (NYSE:WAB), Norwegian Cruise Line Holdings Ltd (NYSE:NCLH), Noble Energy, Inc. (NYSE:NBL), and C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW). This group of stocks’ market valuations are similar to AES’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 31.25 hedge funds with bullish positions and the average amount invested in these stocks was $707 million. That figure was $526 million in AES’s case. Wabtec Corporation (NYSE:WAB) is the most popular stock in this table. On the other hand Noble Energy, Inc. (NYSE:NBL) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks The AES Corporation (NYSE:AES) is even less popular than NBL. Hedge funds dodged a bullet by taking a bearish stance towards AES. Our calculations showed that the top 15 most popular hedge fund stocks returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately AES wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); AES investors were disappointed as the stock returned -11.4% during the same time frame 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 the second quarter.
Disclosure: None. This article was originally published at Insider Monkey.