It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. The Standard and Poor’s 500 Index returned approximately 12.1% in the first 5 months of this year (through May 30th). 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. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. 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 Kansas City Southern (NYSE:KSU).
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.
Let’s take a gander at the key hedge fund action surrounding Kansas City Southern (NYSE:KSU).
How are hedge funds trading Kansas City Southern (NYSE:KSU)?
At the end of the first quarter, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 30% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in KSU over the last 15 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
Among these funds, Luminus Management held the most valuable stake in Kansas City Southern (NYSE:KSU), which was worth $92.2 million at the end of the first quarter. On the second spot was D E Shaw which amassed $61.6 million worth of shares. Moreover, 3G Capital, Holocene Advisors, and Point72 Asset Management were also bullish on Kansas City Southern (NYSE:KSU), allocating a large percentage of their portfolios to this stock.
As one would reasonably expect, specific money managers were leading the bulls’ herd. Luminus Management, managed by Jonathan Barrett and Paul Segal, created the largest position in Kansas City Southern (NYSE:KSU). Luminus Management had $92.2 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also initiated a $48.7 million position during the quarter. The following funds were also among the new KSU investors: Sander Gerber’s Hudson Bay Capital Management, Clint Carlson’s Carlson Capital, and Nick Niell’s Arrowgrass Capital Partners.
Let’s now take a look at hedge fund activity in other stocks similar to Kansas City Southern (NYSE:KSU). These stocks are SVB Financial Group (NASDAQ:SIVB), Akamai Technologies, Inc. (NASDAQ:AKAM), Molson Coors Brewing Company (NYSE:TAP), and Brookfield Infrastructure Partners L.P. (NYSE:BIP). This group of stocks’ market valuations resemble KSU’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 22.75 hedge funds with bullish positions and the average amount invested in these stocks was $415 million. That figure was $561 million in KSU’s case. SVB Financial Group (NASDAQ:SIVB) is the most popular stock in this table. On the other hand Brookfield Infrastructure Partners L.P. (NYSE:BIP) is the least popular one with only 7 bullish hedge fund positions. Kansas City Southern (NYSE:KSU) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on KSU as the stock returned 2.3% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.