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Were Hedge Funds Right About Flocking Into Inphi Corporation (IPHI) ?

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. 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. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. 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 Inphi Corporation (NYSE:IPHI).

Is Inphi Corporation (NYSE:IPHI) a worthy investment today? Investors who are in the know are betting on the stock. The number of bullish hedge fund positions rose by 7 in recent months. Our calculations also showed that IPHI isn’t among the 30 most popular stocks among hedge funds. IPHI was in 21 hedge funds’ portfolios at the end of the fourth quarter of 2018. There were 14 hedge funds in our database with IPHI holdings at the end of the previous quarter.

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.

Richard Driehaus

Let’s take a look at the latest hedge fund action encompassing Inphi Corporation (NYSE:IPHI).

How are hedge funds trading Inphi Corporation (NYSE:IPHI)?

At the end of the fourth quarter, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 50% from one quarter earlier. On the other hand, there were a total of 13 hedge funds with a bullish position in IPHI a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

IPHI_apr2019

The largest stake in Inphi Corporation (NYSE:IPHI) was held by Citadel Investment Group, which reported holding $50 million worth of stock at the end of December. It was followed by Adage Capital Management with a $19.3 million position. Other investors bullish on the company included Carlson Capital, Driehaus Capital, and Maverick Capital.

As one would reasonably expect, key money managers have been driving this bullishness. Tairen Capital, managed by Larry Chen and Terry Zhang, created the most valuable position in Inphi Corporation (NYSE:IPHI). Tairen Capital had $1.6 million invested in the company at the end of the quarter. Matthew Hulsizer’s PEAK6 Capital Management also made a $1.3 million investment in the stock during the quarter. The other funds with brand new IPHI positions are Israel Englander’s Millennium Management, Minhua Zhang’s Weld Capital Management, and Noam Gottesman’s GLG Partners.

Let’s now review hedge fund activity in other stocks similar to Inphi Corporation (NYSE:IPHI). These stocks are Scholastic Corp (NASDAQ:SCHL), Theravance Biopharma Inc (NASDAQ:TBPH), Newmark Group, Inc. (NASDAQ:NMRK), and Waddell & Reed Financial, Inc. (NYSE:WDR). This group of stocks’ market valuations resemble IPHI’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SCHL 13 93687 2
TBPH 8 595309 -3
NMRK 21 126737 4
WDR 16 91430 -1
Average 14.5 226791 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $227 million. That figure was $117 million in IPHI’s case. Newmark Group, Inc. (NASDAQ:NMRK) is the most popular stock in this table. On the other hand Theravance Biopharma Inc (NASDAQ:TBPH) is the least popular one with only 8 bullish hedge fund positions. Inphi Corporation (NYSE:IPHI) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on IPHI as the stock returned 44.6% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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