Were Hedge Funds Right About Flocking Into Brookfield Asset Management Inc. (BAM)?

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 returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% 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’ 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 Brookfield Asset Management Inc. (NYSE:BAM).

Brookfield Asset Management Inc. (NYSE:BAM) investors should pay attention to an increase in support from the world’s most elite money managers recently. Our calculations also showed that BAM isn’t among the 30 most popular stocks among hedge funds.

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 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.

Tom Gayner

Let’s take a peek at the fresh hedge fund action surrounding Brookfield Asset Management Inc. (NYSE:BAM).

What have hedge funds been doing with Brookfield Asset Management Inc. (NYSE:BAM)?

Heading into the first quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 19% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in BAM over the last 14 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).


Of the funds tracked by Insider Monkey, SQ Advisors, managed by Lou Simpson, holds the most valuable position in Brookfield Asset Management Inc. (NYSE:BAM). SQ Advisors has a $321.3 million position in the stock, comprising 12.3% of its 13F portfolio. The second most bullish fund manager is Tom Gayner of Markel Gayner Asset Management, with a $217.6 million position; the fund has 4.2% of its 13F portfolio invested in the stock. Some other professional money managers with similar optimism consist of Martin Whitman’s Third Avenue Management, Murray Stahl’s Horizon Asset Management and John Osterweis’s Osterweis Capital Management.

Now, specific money managers were leading the bulls’ herd. Renaissance Technologies, managed by Jim Simons, established the most valuable position in Brookfield Asset Management Inc. (NYSE:BAM). Renaissance Technologies had $21.2 million invested in the company at the end of the quarter. Josh Tarasoff’s Greenlea Lane Capital also initiated a $21.1 million position during the quarter. The other funds with brand new BAM positions are Amit Wadhwaney’s Moerus Capital Management, Noam Gottesman’s GLG Partners, and Michael Gelband’s ExodusPoint Capital.

Let’s check out hedge fund activity in other stocks similar to Brookfield Asset Management Inc. (NYSE:BAM). These stocks are Mizuho Financial Group Inc. (NYSE:MFG), Waste Management, Inc. (NYSE:WM), Emerson Electric Co. (NYSE:EMR), and Marriott International Inc (NASDAQ:MAR). This group of stocks’ market valuations match BAM’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MFG 4 7797 1
WM 36 3118349 2
EMR 34 944770 2
MAR 32 1801801 3
Average 26.5 1468179 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $1468 million. That figure was $910 million in BAM’s case. Waste Management, Inc. (NYSE:WM) is the most popular stock in this table. On the other hand Mizuho Financial Group Inc. (NYSE:MFG) is the least popular one with only 4 bullish hedge fund positions. Brookfield Asset Management Inc. (NYSE:BAM) is not the least popular stock in this group but hedge fund interest is still below average. Considering that hedge fund interest in BAM is at an all time high, a few hedge funds started seeing a big buying opportunity. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Hedge funds were also right about betting on BAM as the stock returned 21% and outperformed the market as well.

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