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Were Hedge Funds Right About Affiliated Managers Group, Inc. (AMG)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Affiliated Managers Group, Inc. (NYSE:AMG) and determine whether hedge funds had an edge regarding this stock.

Affiliated Managers Group, Inc. (NYSE:AMG) investors should be aware of a decrease in support from the world’s most elite money managers in recent months. AMG was in 27 hedge funds’ portfolios at the end of the first quarter of 2020. There were 38 hedge funds in our database with AMG holdings at the end of the previous quarter. Our calculations also showed that AMG 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.

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 S&P 500 ETFs by more than 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. 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.

Lei Zhang Hillhouse Capital

Lei Zhang of Hillhouse Capital Management

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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Now we’re going to check out the fresh hedge fund action encompassing Affiliated Managers Group, Inc. (NYSE:AMG).

How have hedgies been trading Affiliated Managers Group, Inc. (NYSE:AMG)?

At the end of the first quarter, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -29% from the fourth quarter of 2019. By comparison, 23 hedge funds held shares or bullish call options in AMG 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.

Among these funds, Southeastern Asset Management held the most valuable stake in Affiliated Managers Group, Inc. (NYSE:AMG), which was worth $82.9 million at the end of the third quarter. On the second spot was Lyrical Asset Management which amassed $61.5 million worth of shares. Ariel Investments, Renaissance Technologies, and Hillhouse Capital Management 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 Wallace Capital Management allocated the biggest weight to Affiliated Managers Group, Inc. (NYSE:AMG), around 2.28% of its 13F portfolio. Southeastern Asset Management is also relatively very bullish on the stock, setting aside 1.97 percent of its 13F equity portfolio to AMG.

Due to the fact that Affiliated Managers Group, Inc. (NYSE:AMG) has witnessed falling interest from the aggregate hedge fund industry, it’s easy to see that there were a few fund managers that elected to cut their full holdings last quarter. It’s worth mentioning that Noam Gottesman’s GLG Partners sold off the largest stake of the 750 funds tracked by Insider Monkey, totaling an estimated $7.5 million in stock. Donald Sussman’s fund, Paloma Partners, also cut its stock, about $5.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 11 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Affiliated Managers Group, Inc. (NYSE:AMG) but similarly valued. These stocks are Grupo Aeroportuario del Sureste, S. A. B. de C. V. (NYSE:ASR), Hanesbrands Inc. (NYSE:HBI), RBC Bearings Incorporated (NASDAQ:ROLL), and Physicians Realty Trust (NYSE:DOC). This group of stocks’ market values are closest to AMG’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ASR 4 31709 -6
HBI 36 364607 -4
ROLL 9 39699 -1
DOC 16 133862 5
Average 16.25 142469 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $142 million. That figure was $310 million in AMG’s case. Hanesbrands Inc. (NYSE:HBI) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Sureste, S. A. B. de C. V. (NYSE:ASR) is the least popular one with only 4 bullish hedge fund positions. Affiliated Managers Group, Inc. (NYSE:AMG) is not the most popular stock in this group but hedge fund interest is still above average. 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 but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on AMG as the stock returned 26.1% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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Disclosure: None. This article was originally published at Insider Monkey.