Should You Avoid Legg Mason, Inc. (LM)?

Is Legg Mason, Inc. (NYSE:LM) an exceptional investment today? Investors who are in the know are in a bearish mood. The number of bullish hedge fund positions fell by 4 lately.

According to most shareholders, hedge funds are seen as underperforming, outdated investment vehicles of years past. While there are more than 8000 funds in operation at present, we at Insider Monkey choose to focus on the top tier of this club, about 450 funds. Most estimates calculate that this group controls the lion’s share of the hedge fund industry’s total capital, and by watching their highest performing investments, we have unsheathed a few investment strategies that have historically outpaced the broader indices. Our small-cap hedge fund strategy beat the S&P 500 index by 18 percentage points per year for a decade in our back tests, and since we’ve started sharing our picks with our subscribers at the end of August 2012, we have topped the S&P 500 index by 23.3 percentage points in 8 months (explore the details and some picks here).

Legg Mason, Inc. (NYSE:LM)Just as important, bullish insider trading activity is a second way to break down the investments you’re interested in. As the old adage goes: there are lots of incentives for an insider to sell shares of his or her company, but just one, very simple reason why they would behave bullishly. Several empirical studies have demonstrated the useful potential of this method if “monkeys” understand where to look (learn more here).

Now, let’s take a peek at the latest action regarding Legg Mason, Inc. (NYSE:LM).

What have hedge funds been doing with Legg Mason, Inc. (NYSE:LM)?

In preparation for this quarter, a total of 18 of the hedge funds we track were long in this stock, a change of -18% from one quarter earlier. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their holdings meaningfully.

According to our comprehensive database, Trian Partners, managed by Nelson Peltz, holds the largest position in Legg Mason, Inc. (NYSE:LM). Trian Partners has a $414.2 million position in the stock, comprising 8.9% of its 13F portfolio. The second largest stake is held by Southeastern Asset Management, managed by Mason Hawkins, which held a $167.7 million position; 0.8% of its 13F portfolio is allocated to the stock. Remaining hedge funds that are bullish include Mario Gabelli’s GAMCO Investors, David Einhorn’s Greenlight Capital and Daniel Gold’s QVT Financial.

Seeing as Legg Mason, Inc. (NYSE:LM) has faced a declination in interest from hedge fund managers, it’s safe to say that there lies a certain “tier” of money managers that decided to sell off their entire stakes last quarter. Intriguingly, Jim Simons’s Renaissance Technologies dumped the largest stake of the “upper crust” of funds we watch, comprising an estimated $4 million in stock., and John Overdeck and David Siegel of Two Sigma Advisors was right behind this move, as the fund dumped about $1.5 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 4 funds last quarter.

How are insiders trading Legg Mason, Inc. (NYSE:LM)?

Insider buying is particularly usable when the company we’re looking at has experienced transactions within the past six months. Over the last half-year time period, Legg Mason, Inc. (NYSE:LM) has seen zero unique insiders buying, and 1 insider sales (see the details of insider trades here).

Let’s also take a look at hedge fund and insider activity in other stocks similar to Legg Mason, Inc. (NYSE:LM). These stocks are Waddell & Reed Financial, Inc. (NYSE:WDR), American Capital Ltd. (NASDAQ:ACAS), KKR & Co. L.P. (NYSE:KKR), Och-Ziff Capital Management Group LLC (NYSE:OZM), and Lazard Ltd (NYSE:LAZ). This group of stocks are the members of the asset management industry and their market caps are closest to LM’s market cap.