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 Enstar Group Ltd. (NASDAQ:ESGR).
Is ESGR a good stock to buy now? Enstar Group Ltd. (NASDAQ:ESGR) shareholders have witnessed an increase in activity from the world’s largest hedge funds lately. Enstar Group Ltd. (NASDAQ:ESGR) was in 13 hedge funds’ portfolios at the end of September. The all time high for this statistic is 14. There were 12 hedge funds in our database with ESGR positions at the end of the second quarter. Our calculations also showed that ESGR isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
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 S&P 500 ETFs by more than 66 percentage points since March 2017 (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 stocks that are in our short portfolio.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now let’s check out the recent hedge fund action regarding Enstar Group Ltd. (NASDAQ:ESGR).
Do Hedge Funds Think ESGR Is A Good Stock To Buy Now?
At the end of September, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from one quarter earlier. On the other hand, there were a total of 13 hedge funds with a bullish position in ESGR a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Hillhouse Capital Management was the largest shareholder of Enstar Group Ltd. (NASDAQ:ESGR), with a stake worth $282.3 million reported as of the end of September. Trailing Hillhouse Capital Management was Diamond Hill Capital, which amassed a stake valued at $43.4 million. Millennium Management, Winton Capital Management, and Arrowstreet Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Capital Returns Management allocated the biggest weight to Enstar Group Ltd. (NASDAQ:ESGR), around 5% of its 13F portfolio. Hillhouse Capital Management is also relatively very bullish on the stock, dishing out 2.14 percent of its 13F equity portfolio to ESGR.
With a general bullishness amongst the heavyweights, key money managers have jumped into Enstar Group Ltd. (NASDAQ:ESGR) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the biggest position in Enstar Group Ltd. (NASDAQ:ESGR). Arrowstreet Capital had $3.4 million invested in the company at the end of the quarter. Donald Sussman’s Paloma Partners also made a $0.6 million investment in the stock during the quarter. The following funds were also among the new ESGR investors: Paul Tudor Jones’s Tudor Investment Corp and Michael Gelband’s ExodusPoint Capital.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Enstar Group Ltd. (NASDAQ:ESGR) but similarly valued. These stocks are Apache Corporation (NYSE:APA), bluebird bio Inc (NASDAQ:BLUE), TCF Financial Corporation (NYSE:TCF), Flowserve Corporation (NYSE:FLS), Canada Goose Holdings Inc. (NYSE:GOOS), Southwest Gas Holdings, Inc. (NYSE:SWX), and Valvoline Inc. (NYSE:VVV). This group of stocks’ market caps are closest to ESGR’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 25.6 hedge funds with bullish positions and the average amount invested in these stocks was $274 million. That figure was $343 million in ESGR’s case. Apache Corporation (NYSE:APA) is the most popular stock in this table. On the other hand TCF Financial Corporation (NYSE:TCF) is the least popular one with only 11 bullish hedge fund positions. Enstar Group Ltd. (NASDAQ:ESGR) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ESGR is 37.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. A small number of hedge funds were also right about betting on ESGR as the stock returned 22.2% since the end of the third quarter (through 12/8) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.