We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Vedanta Ltd (NYSE:VEDL) and determine whether hedge funds skillfully traded this stock.
Is Vedanta Ltd (NYSE:VEDL) ready to rally soon? Prominent investors were becoming less confident. The number of bullish hedge fund positions fell by 2 recently. Our calculations also showed that VEDL isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.
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’ 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 58 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a look at the key hedge fund action surrounding Vedanta Ltd (NYSE:VEDL).
How have hedgies been trading Vedanta Ltd (NYSE:VEDL)?
At the end of the first quarter, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -15% from the previous quarter. On the other hand, there were a total of 6 hedge funds with a bullish position in VEDL 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.
More specifically, Renaissance Technologies was the largest shareholder of Vedanta Ltd (NYSE:VEDL), with a stake worth $9.6 million reported as of the end of September. Trailing Renaissance Technologies was AQR Capital Management, which amassed a stake valued at $8.6 million. Arrowstreet Capital, Citadel Investment Group, and Two Sigma Advisors 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 Paloma Partners allocated the biggest weight to Vedanta Ltd (NYSE:VEDL), around 0.04% of its 13F portfolio. CSat Investment Advisory is also relatively very bullish on the stock, dishing out 0.02 percent of its 13F equity portfolio to VEDL.
Since Vedanta Ltd (NYSE:VEDL) has faced declining sentiment from the smart money, it’s safe to say that there is a sect of hedge funds who were dropping their positions entirely by the end of the first quarter. It’s worth mentioning that Andy Redleaf’s Whitebox Advisors said goodbye to the largest stake of all the hedgies followed by Insider Monkey, valued at close to $9.6 million in stock. Matthew Tewksbury’s fund, Stevens Capital Management, also said goodbye to its stock, about $0.1 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 2 funds by the end of the first quarter.
Let’s now review hedge fund activity in other stocks similar to Vedanta Ltd (NYSE:VEDL). We will take a look at Aerojet Rocketdyne Holdings Inc (NYSE:AJRD), ADT Inc. (NYSE:ADT), Williams-Sonoma, Inc. (NYSE:WSM), and Floor & Decor Holdings, Inc. (NYSE:FND). All of these stocks’ market caps are similar to VEDL’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 23 hedge funds with bullish positions and the average amount invested in these stocks was $276 million. That figure was $27 million in VEDL’s case. Williams-Sonoma, Inc. (NYSE:WSM) is the most popular stock in this table. On the other hand ADT Inc. (NYSE:ADT) is the least popular one with only 20 bullish hedge fund positions. Compared to these stocks Vedanta Ltd (NYSE:VEDL) is even less popular than ADT. Hedge funds clearly dropped the ball on VEDL as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on VEDL as the stock returned 57.6% in the second quarter and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.