Melco Crown Entertainment Ltd (MPEL) Up On China Easing Macau Restrictions: Have Hedge Funds Anticipated This Development?

China is relaxing some restrictions it put on citizens holding mainland China passports travelling to Macau and it has pushed stocks like Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) up today. The stock of the casino and entertainment resort operator surged by more than 9%, alongside several other casino stocks, helped by news from the official Xinhua News Agency that mainland China passport holders can now stay seven days in Macau, two more than previously allowed. China began limiting the permitted number of days that mainland citizens could stay in Macau last year, under the terms of its anti-corruption movement. The changes in the policy may help stem the fall of betting in Macau, considered the leading casino market in the world. Year-to-date, Melco Crown’s stock has fallen by 25.44% as a reaction to lesser and lesser money in markets like Macau. Over the last year, the stock has plummeted by 46.7%.

It appears that hedge funds have positioned their investments on this downward trend for casino stocks. In the case of Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL), a total of 25 of the hedge funds tracked by Insider Monkey held long positions at the end of Marh, down by 24% from the fourth quarter of 2014. The value of total holdings also went down to $462.87 million by the end of the first quarter from $689.72 million the quarter before. This is a considerable decline as the stock of Melco Crown Entertainment lost 15.51% in the first quarter.

We follow hedge funds because our research has shown that their stock picks historically managed to generate alpha even though the filings are up to 45-days delayed. We used a 60-day delay in our back tests to be on the safe side and our research showed that the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Total Return Index by an average of 95 basis points per month between 1999 and 2012. After adjusting for risk, our calculations revealed that these stocks’ monthly alpha was 80 basis points. We have also been sharing and tracking the performance of these stocks since the end of August 2012, during which time they have returned 144%, outperforming the S&P 500 ETF by nearly 85 percentage points (see more details here). Insider Monkey also follows insider sentiment based on sales or purchases of company shares but in the case of Melco Crown Entertainment, there were no recorded sales or purchases of shares by insiders within the first two quarters of the year. Given this lack of insider sales or purchases, let’s examine how hedge funds were treating the firm by the end of the first quarter.