Billionaire hedge fund managers such as Steve Cohen and Stan Druckenmiller can generate millions or even billions of dollars every year by pinning down high-potential small-cap stocks and pouring cash into these candidates. Small-cap stocks are overlooked by most investors, brokerage houses, and financial services hubs, while the unlimited research abilities of the big players within the hedge fund industry can easily identify the undervalued and high-potential stocks that reside the ignored corners of equity markets. There are numerous small-cap stocks that have turned out to be great winners, which is one of the main reasons the Insider Monkey team pays close attention to the hedge fund activity in relation to these stocks.
Redwood Trust, Inc. (NYSE:RWT) shareholders have witnessed an increase in support from the world’s most elite money managers in recent months. RWT was in 12 hedge funds’ portfolios at the end of September. There were 9 hedge funds in our database with RWT holdings at the end of the previous quarter. Our calculations also showed that rwt 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 18 percentage points since May 2014 through December 3, 2018 (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 review the recent hedge fund action surrounding Redwood Trust, Inc. (NYSE:RWT).
How are hedge funds trading Redwood Trust, Inc. (NYSE:RWT)?
Heading into the fourth quarter of 2018, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 33% from the previous quarter. By comparison, 11 hedge funds held shares or bullish call options in RWT heading into this year. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey’s hedge fund database, Wallace R. Weitz & Co., managed by Wallace Weitz, holds the biggest position in Redwood Trust, Inc. (NYSE:RWT). Wallace R. Weitz & Co. has a $57.5 million position in the stock, comprising 2.3% of its 13F portfolio. The second largest stake is held by PEAK6 Capital Management, managed by Matthew Hulsizer, which holds a $9.6 million call position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other members of the smart money with similar optimism include Ken Griffin’s Citadel Investment Group, Jim Simons’s Renaissance Technologies and Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital.
As aggregate interest increased, key hedge funds have been driving this bullishness. Balyasny Asset Management, managed by Dmitry Balyasny, created the biggest position in Redwood Trust, Inc. (NYSE:RWT). Balyasny Asset Management had $1.6 million invested in the company at the end of the quarter. Alec Litowitz and Ross Laser’s Magnetar Capital also made a $0.2 million investment in the stock during the quarter. The only other fund with a brand new RWT position is Roger Ibbotson’s Zebra Capital Management.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Redwood Trust, Inc. (NYSE:RWT) but similarly valued. We will take a look at TPG RE Finance Trust, Inc. (NYSE:TRTX), Uniqure NV (NASDAQ:QURE), Bluegreen Vacations Corporation (NYSE:BXG), and Brookline Bancorp, Inc. (NASDAQ:BRKL). This group of stocks’ market values are similar to RWT’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TRTX | 10 | 28122 | 6 |
| QURE | 19 | 320752 | 0 |
| BXG | 2 | 5851 | 1 |
| BRKL | 6 | 53207 | -2 |
| Average | 9.25 | 101983 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $102 million. That figure was $76 million in RWT’s case. Uniqure NV (NASDAQ:QURE) is the most popular stock in this table. On the other hand Bluegreen Vacations Corporation (NYSE:BXG) is the least popular one with only 2 bullish hedge fund positions. Redwood Trust, Inc. (NYSE:RWT) 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. In this regard QURE might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
