Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors' favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the third quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds' top consensus picks. This year hedge funds' top 20 stock picks outperformed the S&P 500 Index by 4 percentage points through September 30th. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.
Hedge fund interest in Chiasma Inc (NASDAQ:CHMA) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as ChannelAdvisor Corporation (NYSE:ECOM), Cambium Networks Corporation (NASDAQ:CMBM), and Arlington Asset Investment Corp (NYSE:AI) to gather more data points. Our calculations also showed that CHMA 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.
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 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.
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. Now we're going to go over the new hedge fund action regarding Chiasma Inc (NASDAQ:CHMA).
What does smart money think about Chiasma Inc (NASDAQ:CHMA)?
At Q2's end, a total of 7 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the first quarter of 2019. By comparison, 4 hedge funds held shares or bullish call options in CHMA a year ago. With the smart money's capital changing hands, there exists a select group of notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
The largest stake in Chiasma Inc (NASDAQ:CHMA) was held by EcoR1 Capital, which reported holding $22.7 million worth of stock at the end of March. It was followed by Vivo Capital with a $17.8 million position. Other investors bullish on the company included Rock Springs Capital Management, Renaissance Technologies, and Ghost Tree Capital.
Because Chiasma Inc (NASDAQ:CHMA) has faced a decline in interest from the smart money, it's safe to say that there is a sect of fund managers that slashed their entire stakes by the end of the second quarter. Interestingly, Ori Hershkovitz's Nexthera Capital dropped the biggest position of all the hedgies watched by Insider Monkey, comprising close to $1.1 million in stock. Anand Parekh's fund, Alyeska Investment Group, also dumped its stock, about $1 million worth. These transactions are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Chiasma Inc (NASDAQ:CHMA) but similarly valued. We will take a look at ChannelAdvisor Corporation (NYSE:ECOM), Cambium Networks Corporation (NASDAQ:CMBM), Arlington Asset Investment Corp (NYSE:AI), and General Finance Corporation (NASDAQ:GFN). This group of stocks' market caps are similar to CHMA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ECOM,14,44320,0 CMBM,11,12253,11 AI,7,13961,1 GFN,5,7777,-2 Average,9.25,19578,2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $20 million. That figure was $52 million in CHMA's case. ChannelAdvisor Corporation (NYSE:ECOM) is the most popular stock in this table. On the other hand General Finance Corporation (NASDAQ:GFN) is the least popular one with only 5 bullish hedge fund positions. Chiasma Inc (NASDAQ:CHMA) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately CHMA wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CHMA investors were disappointed as the stock returned -33.7% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.