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 Pixelworks, Inc. (NASDAQ:PXLW).
Pixelworks, Inc. (NASDAQ:PXLW) has experienced an increase in support from the world’s most elite money managers lately. Our calculations also showed that PXLW isn’t among the 30 most popular stocks among hedge funds.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Let’s take a glance at the new hedge fund action encompassing Pixelworks, Inc. (NASDAQ:PXLW).
What have hedge funds been doing with Pixelworks, Inc. (NASDAQ:PXLW)?
At Q1’s end, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 22% from one quarter earlier. By comparison, 11 hedge funds held shares or bullish call options in PXLW a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Renaissance Technologies held the most valuable stake in Pixelworks, Inc. (NASDAQ:PXLW), which was worth $1.5 million at the end of the first quarter. On the second spot was Millennium Management which amassed $1.1 million worth of shares. Moreover, Citadel Investment Group, Arrowstreet Capital, and Two Sigma Advisors were also bullish on Pixelworks, Inc. (NASDAQ:PXLW), allocating a large percentage of their portfolios to this stock.
As one would reasonably expect, specific money managers were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the largest position in Pixelworks, Inc. (NASDAQ:PXLW). Arrowstreet Capital had $0.3 million invested in the company at the end of the quarter. Michael Gelband’s ExodusPoint Capital also made a $0.1 million investment in the stock during the quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Pixelworks, Inc. (NASDAQ:PXLW) but similarly valued. These stocks are Natural Health Trends Corp. (NASDAQ:NHTC), Allena Pharmaceuticals, Inc. (NASDAQ:ALNA), Quintana Energy Services Inc. (NYSE:QES), and First Community Corporation (NASDAQ:FCCO). This group of stocks’ market valuations match PXLW’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NHTC | 12 | 22918 | 3 |
| ALNA | 5 | 37096 | 0 |
| QES | 2 | 14253 | 0 |
| FCCO | 3 | 11917 | 0 |
| Average | 5.5 | 21546 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 5.5 hedge funds with bullish positions and the average amount invested in these stocks was $22 million. That figure was $4 million in PXLW’s case. Natural Health Trends Corp. (NASDAQ:NHTC) is the most popular stock in this table. On the other hand Quintana Energy Services Inc. (NYSE:QES) is the least popular one with only 2 bullish hedge fund positions. Pixelworks, Inc. (NASDAQ:PXLW) 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 PXLW wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on PXLW were disappointed as the stock returned -25% 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.
