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 Ardelyx Inc (NASDAQ:ARDX).
Ardelyx Inc (NASDAQ:ARDX) investors should pay attention to a decrease in hedge fund sentiment lately. ARDX was in 12 hedge funds’ portfolios at the end of March. There were 14 hedge funds in our database with ARDX holdings at the end of the previous quarter. Our calculations also showed that ARDX 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 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.
We’re going to go over the latest hedge fund action surrounding Ardelyx Inc (NASDAQ:ARDX).
Hedge fund activity in Ardelyx Inc (NASDAQ:ARDX)
At Q1’s end, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from the fourth quarter of 2018. On the other hand, there were a total of 12 hedge funds with a bullish position in ARDX a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
The largest stake in Ardelyx Inc (NASDAQ:ARDX) was held by Adage Capital Management, which reported holding $11.2 million worth of stock at the end of March. It was followed by Deerfield Management with a $9.2 million position. Other investors bullish on the company included Rock Springs Capital Management, Renaissance Technologies, and 683 Capital Partners.
Due to the fact that Ardelyx Inc (NASDAQ:ARDX) has experienced bearish sentiment from the smart money, logic holds that there lies a certain “tier” of funds that decided to sell off their positions entirely in the third quarter. It’s worth mentioning that Israel Englander’s Millennium Management cut the biggest investment of all the hedgies monitored by Insider Monkey, valued at close to $0.3 million in stock, and Ken Griffin’s Citadel Investment Group was right behind this move, as the fund cut about $0.1 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 2 funds in the third quarter.
Let’s now take a look at hedge fund activity in other stocks similar to Ardelyx Inc (NASDAQ:ARDX). These stocks are IDT Corporation (NYSE:IDT), Olympic Steel, Inc. (NASDAQ:ZEUS), Akoustis Technologies, Inc. (NASDAQ:AKTS), and Paratek Pharmaceuticals Inc (NASDAQ:PRTK). This group of stocks’ market valuations resemble ARDX’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
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As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $22 million. That figure was $40 million in ARDX’s case. IDT Corporation (NYSE:IDT) is the most popular stock in this table. On the other hand Olympic Steel, Inc. (NASDAQ:ZEUS) is the least popular one with only 8 bullish hedge fund positions. Ardelyx Inc (NASDAQ:ARDX) 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately ARDX wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ARDX were disappointed as the stock returned -8.9% 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.