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Were Hedge Funds Right About Dumping Social Capital Hedosophia Holdings Corp. (IPOA)?

You probably know from experience that there is not as much information on small-cap companies as there is on large companies. Of course, this makes it really hard and difficult for individual investors to make proper and accurate analysis of certain small-cap companies. However, well-known and successful hedge fund managers like Jeff Ubben, George Soros and Seth Klarman hold the necessary resources and abilities to conduct an extensive stock analysis on small-cap stocks, which enable them to make millions of dollars by identifying potential winners within the small-cap galaxy of stocks. This represents the main reason why Insider Monkey takes notice of the hedge fund activity in these overlooked stocks.

Social Capital Hedosophia Holdings Corp. (NYSE:IPOA) has experienced a decrease in hedge fund sentiment of late. Our calculations also showed that IPOA 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 32 percentage points since May 2014 through March 12, 2019 (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.

Paul Glazer of Glazer Capital

Let’s analyze the recent hedge fund action regarding Social Capital Hedosophia Holdings Corp. (NYSE:IPOA).

Hedge fund activity in Social Capital Hedosophia Holdings Corp. (NYSE:IPOA)

Heading into the first quarter of 2019, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from one quarter earlier. By comparison, 27 hedge funds held shares or bullish call options in IPOA 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.

IPOA_may2019

More specifically, Arrowgrass Capital Partners was the largest shareholder of Social Capital Hedosophia Holdings Corp. (NYSE:IPOA), with a stake worth $45 million reported as of the end of December. Trailing Arrowgrass Capital Partners was Angelo Gordon & Co, which amassed a stake valued at $30 million. Governors Lane, Highbridge Capital Management, and Vertex One Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as Social Capital Hedosophia Holdings Corp. (NYSE:IPOA) has faced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there lies a certain “tier” of fund managers that elected to cut their full holdings last quarter. At the top of the heap, Paul Glazer’s Glazer Capital dumped the biggest stake of the “upper crust” of funds tracked by Insider Monkey, worth an estimated $4.9 million in stock. Jamie Mendola’s fund, Pacific Grove Capital, also cut its stock, about $1.2 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 2 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to Social Capital Hedosophia Holdings Corp. (NYSE:IPOA). These stocks are PJT Partners Inc (NYSE:PJT), Natera Inc (NASDAQ:NTRA), Qiwi PLC (NASDAQ:QIWI), and Bain Capital Specialty Finance, Inc. (NYSE:BCSF). This group of stocks’ market valuations match IPOA’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PJT 18 141813 1
NTRA 17 99976 -4
QIWI 8 96327 0
BCSF 3 27479 3
Average 11.5 91399 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $91 million. That figure was $289 million in IPOA’s case. PJT Partners Inc (NYSE:PJT) is the most popular stock in this table. On the other hand Bain Capital Specialty Finance, Inc. (NYSE:BCSF) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Social Capital Hedosophia Holdings Corp. (NYSE:IPOA) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately IPOA wasn’t nearly as popular as these 15 stock and hedge funds that were betting on IPOA were disappointed as the stock returned 2.3% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.

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

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