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 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period. An average long/short hedge fund returned only a fraction of this 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’ consensus 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 Avedro, Inc. (NASDAQ:AVDR).
Is Avedro, Inc. (NASDAQ:AVDR) a buy right now? The best stock pickers are taking a bearish view. The number of bullish hedge fund positions went down by 5 recently. Our calculations also showed that AVDR isn’t among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 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.
In addition to following the biggest hedge funds for investment ideas, we also share stock pitches from conferences, investor letters and other sources like this one where the fund manager is talking about two under the radar 1000% return potential stocks: first one in internet infrastructure and the second in the heart of advertising market. We use hedge fund buy/sell signals to determine whether to conduct in-depth analysis of these stock ideas which take days. We’re going to take a look at the recent hedge fund action encompassing Avedro, Inc. (NASDAQ:AVDR).
How are hedge funds trading Avedro, Inc. (NASDAQ:AVDR)?
Heading into the third quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -38% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AVDR over the last 16 quarters. With hedge funds’ sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
The largest stake in Avedro, Inc. (NASDAQ:AVDR) was held by OrbiMed Advisors, which reported holding $83.3 million worth of stock at the end of March. It was followed by Endurant Capital Management with a $7 million position. Other investors bullish on the company included Millennium Management, Redmile Group, and Pentwater Capital Management.
Judging by the fact that Avedro, Inc. (NASDAQ:AVDR) has witnessed a decline in interest from the smart money, it’s safe to say that there were a few money managers that elected to cut their entire stakes last quarter. It’s worth mentioning that Joseph Edelman’s Perceptive Advisors dumped the largest investment of the “upper crust” of funds monitored by Insider Monkey, valued at about $1.2 million in stock, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund sold off about $0.9 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 5 funds last quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Avedro, Inc. (NASDAQ:AVDR) but similarly valued. These stocks are DryShips Inc. (NASDAQ:DRYS), Avid Bioservices, Inc. (NASDAQ:CDMO), Teekay Corporation (NYSE:TK), and Nathan’s Famous, Inc. (NASDAQ:NATH). This group of stocks’ market caps resemble AVDR’s market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DRYS,2,619,-1 CDMO,7,32056,-2 TK,13,19423,3 NATH,6,43132,0 Average,7,23808,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $24 million. That figure was $102 million in AVDR’s case. Teekay Corporation (NYSE:TK) is the most popular stock in this table. On the other hand DryShips Inc. (NASDAQ:DRYS) is the least popular one with only 2 bullish hedge fund positions. Avedro, Inc. (NASDAQ:AVDR) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on AVDR as the stock returned 15.6% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
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