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Hedge Funds In Trouble, Waiting for the Rally of a Lifetime

Posted
9/9/2011 7:39:00 PM
By: Kapitall
Referenced Stocks:AHGP;BKU;EXPR;FPTB;PLOW;PPL;TRST;WTW

(Article by Becca Lipman. List compiled by Eben Esterhuizen, CFAInstitutional data and profitability data sourced from Fidelity, all other data sourced from Finviz.)

Hedge Funds are at risk of ending two of the past four years in the red. In an attempt to avoid that fate, they cling to a hope that core holdings in equity markets will rebound in the coming months.

"Barring a rapid rebound in the final months of the year, traders are now staring at the prospect of another negative year, after a loss of some 27 percent in 2008 according to HFRI, and of no lucrative performance fee for some time to come." (Via Reuters)

Hedge funds have reacted in a number of ways to the down-trending market, from spurts of aggressive short selling to simply holding tight. For certain, most hedge funds are hoping for a rally in the last four months of 2011. History is on their side after all - rallies in 2009 and 2010 drove "a late surge in hedge fund performance."

An anonymous fund executive reported to Reuters: "What's different this time is that while many funds have de-risked, many have kept core positions and are in a reasonable position to bounce back if there is a recovery."

But according to Reuters, questions are emerging about hedge funds' ties to overall market trends and their ability to separate from it.

Previous articles by Kapitall have addressed the record high 0.73 correlation between the S&P 500 index and its members' performances. This is due in large part to ETFs using high frequency trading, which trade baskets of stocks numbering in the millions without accounting for the individual companies fundamentals.

The result being that market values of companies go up and down with the greater market trends whether the individual stock be deserving of the change or not. This also means that even if core equity companies perform well in a down-trending market, the stocks may still be dragged down to the dismay of their investors.

However, a positive rally at the current levels of correlation, which long hedge funds are hoping for, would be favorable all around. A small rally could be enough to close the year out with positive returns.

Interested in what stocks hedge funds are positioning themselves with in the event of an advantageous rally?

To help you find ideas, we identified a list of highly profitable companies, backed by significant institutional buying during the current quarter. Do you think these stocks have the potential Big Money is hoping for?

Analyze These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned

1. BankUnited, Inc. (BKU): Operates as the holding company for BankUnited that provides various banking products and services to consumers, and commercial and middle-market businesses. During the current quarter, institutional investors have been net buyers of 14.0M shares, which represents about 40.97% of the company's float of 34.17M shares. TTM gross margin at 77.45% vs. industry average at 61.08%. TTM operating margin at 53.76% vs. industry average at 33.08%. TTM pretax margin at 19.43% vs. industry average at 13.7%.

2. Express Inc. (EXPR): Operates specialty retail stores in the United States. During the current quarter, institutional investors have been net buyers of 6.8M shares, which represents about 19.64% of the company's float of 34.63M shares. TTM gross margin at 38.69% vs. industry average at 38.34%. TTM operating margin at 12.32% vs. industry average at 10.07%. TTM pretax margin at 10.44% vs. industry average at 9.37%.

3. PPL Corporation (PPL): Generates and sells electricity; and delivers natural gas to approximately 5.3 million utility customers primarily in the northeastern and northwestern US. During the current quarter, institutional investors have been net buyers of 95.5M shares, which represents about 16.54% of the company's float of 577.48M shares. TTM gross margin at 35.55% vs. industry average at 27.54%. TTM operating margin at 27.58% vs. industry average at 19.03%. TTM pretax margin at 17.96% vs. industry average at 14.61%.

4. First Pactrust Bancorp Inc. (FPTB): Operates as a holding company for Pacific Trust Bank that provides retail banking services primarily in San Diego and Riverside Counties, California. During the current quarter, institutional investors have been net buyers of 1.4M shares, which represents about 15.89% of the company's float of 8.81M shares. TTM gross margin at 78.49% vs. industry average at 61.08%. TTM operating margin at 45.4% vs. industry average at 33.08%. TTM pretax margin at 20.45% vs. industry average at 13.7%.

5. Weight Watchers International, Inc. (WTW): Provides weight management services worldwide. During the current quarter, institutional investors have been net buyers of 5.5M shares, which represents about 15.67% of the company's float of 35.09M shares. TTM gross margin at 57.68% vs. industry average at 53.29%. TTM operating margin at 28.88% vs. industry average at 21.8%. TTM pretax margin at 24.31% vs. industry average at 18.24%.

6. Alliance Holdings GP, L.P. (AHGP): Produces and markets coal primarily to utilities and industrial users in the United States. During the current quarter, institutional investors have been net buyers of 488.4K shares, which represents about 15.26% of the company's float of 3.20M shares. TTM gross margin at 34.64% vs. industry average at 32.88%. TTM operating margin at 22.35% vs. industry average at 16.42%. TTM pretax margin at 20.51% vs. industry average at 17.3%.

7. TrustCo Bank Corp. NY (TRST): Operates as the holding company for Trustco Bank that provides various banking products and services to individuals, partnerships, and corporations. During the current quarter, institutional investors have been net buyers of 13.5M shares, which represents about 15.04% of the company's float of 89.78M shares. TTM gross margin at 71.5% vs. industry average at 61.08%. TTM operating margin at 41.85% vs. industry average at 33.08%. TTM pretax margin at 25.43% vs. industry average at 13.7%.

8. Douglas Dynamics, Inc. (PLOW): Designs, manufactures, and sells snow and ice control equipment for light trucks in North America. During the current quarter, institutional investors have been net buyers of 2.7M shares, which represents about 13.45% of the company's float of 20.08M shares. TTM gross margin at 37.87% vs. industry average at 32.61%. TTM operating margin at 20.88% vs. industry average at 12.5%. TTM pretax margin at 14.76% vs. industry average at 10.79%.