Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. 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 Verint Systems Inc. (NASDAQ:VRNT).
Verint Systems Inc. (NASDAQ:VRNT) investors should be aware of a decrease in enthusiasm from smart money recently. Our calculations also showed that VRNT isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.
Arnaud Ajdler of Engine Capital
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a gander at the fresh hedge fund action regarding Verint Systems Inc. (NASDAQ:VRNT).
Hedge fund activity in Verint Systems Inc. (NASDAQ:VRNT)
At Q3’s end, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from the second quarter of 2019. By comparison, 18 hedge funds held shares or bullish call options in VRNT a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, RGM Capital, managed by Robert G. Moses, holds the largest position in Verint Systems Inc. (NASDAQ:VRNT). RGM Capital has a $94.7 million position in the stock, comprising 6.3% of its 13F portfolio. Coming in second is Fisher Asset Management, led by Ken Fisher, holding a $80.6 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish encompass Amish Mehta’s SQN Investors, Cliff Asness’s AQR Capital Management and Noam Gottesman’s GLG Partners. In terms of the portfolio weights assigned to each position RGM Capital allocated the biggest weight to Verint Systems Inc. (NASDAQ:VRNT), around 6.3% of its 13F portfolio. SQN Investors is also relatively very bullish on the stock, earmarking 5.85 percent of its 13F equity portfolio to VRNT.
Since Verint Systems Inc. (NASDAQ:VRNT) has witnessed falling interest from the entirety of the hedge funds we track, it’s safe to say that there was a specific group of hedgies that decided to sell off their full holdings heading into Q4. Intriguingly, Josh Resnick’s Jericho Capital Asset Management sold off the largest investment of the 750 funds watched by Insider Monkey, totaling an estimated $28.7 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital was right behind this move, as the fund dropped about $13.6 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 2 funds heading into Q4.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Verint Systems Inc. (NASDAQ:VRNT) but similarly valued. These stocks are FireEye Inc (NASDAQ:FEYE), Coca-Cola Consolidated, Inc. (NASDAQ:COKE), QTS Realty Trust Inc (NYSE:QTS), and Moog Inc (NYSE:MOG). This group of stocks’ market values are similar to VRNT’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FEYE | 29 | 255297 | 0 |
| COKE | 14 | 20018 | 3 |
| QTS | 24 | 382800 | 1 |
| MOG | 20 | 102823 | 2 |
| Average | 21.75 | 190235 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $190 million. That figure was $269 million in VRNT’s case. FireEye Inc (NASDAQ:FEYE) is the most popular stock in this table. On the other hand Coca-Cola Consolidated, Inc. (NASDAQ:COKE) is the least popular one with only 14 bullish hedge fund positions. Verint Systems Inc. (NASDAQ:VRNT) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on VRNT as the stock returned 13.6% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
