We have been waiting for this for a year and finally the third quarter ended up showing a nice bump in the performance of small-cap stocks. Both the S&P 500 and Russell 2000 were up since the end of the second quarter, but small-cap stocks outperformed the large-cap stocks by double digits. This is important for hedge funds, which are big supporters of small-cap stocks, because their investors started pulling some of their capital out due to poor recent performance. It is very likely that equity hedge funds will deliver better risk adjusted returns in the second half of this year. In this article we are going to look at how this recent market trend affected the sentiment of hedge funds towards ExlService Holdings, Inc. (NASDAQ:EXLS) , and what that likely means for the prospects of the company and its stock.

ExlService Holdings, Inc. was in 8 hedge funds’ portfolios at the end of the third quarter of 2016. EXLS investors should pay attention to a decrease in support from the world’s most successful money managers in recent months. There were 13 hedge funds in our database with EXLS positions at the end of the previous quarter. 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 USANA Health Sciences, Inc. (NYSE:USNA), Core-Mark Holding Company, Inc. (NASDAQ:CORE), and Northwest Natural Gas Co (NYSE:NWN) to gather more data points.

We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.

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Now, let’s analyze the recent action encompassing ExlService Holdings, Inc.

What does the smart money think about ExlService Holdings, Inc.?

At Q3’s end, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -38% from one quarter earlier. By comparison, 13 hedge funds held shares or bullish call options in EXLS heading into this year. With hedge funds’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Renaissance Technologies,one of the largest hedge fundsin the world, holds the most valuable position in ExlService Holdings, Inc. Renaissance Technologies has a $30.6 million position in the stock, comprising 0.1% of its 13F portfolio. The second largest stake is held by Arrowstreet Capital, led by Peter Rathjens, Bruce Clarke, and John Campbell, which holds a $12.9 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that are bullish consist of Cliff Asness’s AQR Capital Management, D. E. Shaw’s D E Shaw and John Overdeck and David Siegel’s Two Sigma Advisors. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

We already know that not all hedge funds are bullish on the stock and some hedge funds actually dumped their positions entirely. It’s worth mentioning that Richard Driehaus’s Driehaus Capital dumped the biggest position of all the investors tracked by Insider Monkey, comprising an estimated $6.4 million in stock. Ernest Chow and Jonathan Howe’s fund, Sensato Capital Management, also said goodbye to its stock, about $3.1 million worth.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as ExlService Holdings, Inc. but similarly valued. We will take a look at USANA Health Sciences, Inc., Core-Mark Holding Company, Inc., Northwest Natural Gas Co, and Eagle Bancorp, Inc. (NASDAQ:EGBN). This group of stocks’ market valuations are closest to EXLS’s market valuation.

As you can see these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $71 million. That figure was $56 million in EXLS’s case. Eagle Bancorp, Inc. is the most popular stock in this table. On the other hand Northwest Natural Gas Co is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks ExlService Holdings, Inc. is even less popular than NWN. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.