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 9 months of this year through September 30th the Standard and Poor’s 500 Index returned approximately 20% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-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 Inphi Corporation (NYSE:IPHI).
Is Inphi Corporation (NYSE:IPHI) undervalued? Hedge funds are getting more optimistic. The number of bullish hedge fund bets advanced by 5 recently. Our calculations also showed that IPHI isn’t among the 30 most popular stocks among hedge funds (view the video below). IPHI was in 26 hedge funds’ portfolios at the end of June. There were 21 hedge funds in our database with IPHI holdings at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s take a gander at the latest hedge fund action surrounding Inphi Corporation (NYSE:IPHI).
How have hedgies been trading Inphi Corporation (NYSE:IPHI)?
At the end of the second quarter, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 24% from one quarter earlier. By comparison, 11 hedge funds held shares or bullish call options in IPHI a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Millennium Management was the largest shareholder of Inphi Corporation (NYSE:IPHI), with a stake worth $31.8 million reported as of the end of March. Trailing Millennium Management was Balyasny Asset Management, which amassed a stake valued at $31.2 million. Cavalry Asset Management, D E Shaw, and Two Sigma Advisors were also very fond of the stock, giving the stock large weights in their portfolios.
With a general bullishness amongst the heavyweights, key money managers were breaking ground themselves. Tudor Investment Corp, managed by Paul Tudor Jones, established the biggest position in Inphi Corporation (NYSE:IPHI). Tudor Investment Corp had $5.4 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $3.9 million position during the quarter. The other funds with brand new IPHI positions are Andrew Sandler’s Sandler Capital Management, James Dondero’s Highland Capital Management, and Will Graves’s Boardman Bay Capital Management.
Let’s go over hedge fund activity in other stocks similar to Inphi Corporation (NYSE:IPHI). These stocks are First Bancorp (NYSE:FBP), Applied Industrial Technologies, Inc. (NYSE:AIT), Canada Goose Holdings Inc. (NYSE:GOOS), and Alamos Gold Inc (NYSE:AGI). This group of stocks’ market caps are closest to IPHI’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 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $150 million. That figure was $220 million in IPHI’s case. First Bancorp (NYSE:FBP) is the most popular stock in this table. On the other hand Alamos Gold Inc (NYSE:AGI) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Inphi Corporation (NYSE:IPHI) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on IPHI as the stock returned 21.9% during Q3 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.