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Ares Commercial Real Estate Corp (ACRE): Hedge Funds Sticking Around

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Ares Commercial Real Estate Corp (NYSE:ACRE) and determine whether hedge funds skillfully traded this stock.

Ares Commercial Real Estate Corp (NYSE:ACRE) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 10 hedge funds’ portfolios at the end of March. At the end of this article we will also compare ACRE to other stocks including Limoneira Company (NASDAQ:LMNR), Alico, Inc. (NASDAQ:ALCO), and Bonanza Creek Energy Inc (NYSE:BCEI) to get a better sense of its popularity.

Video: 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 S&P 500 ETFs by 58 percentage points since March 2017 (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.

David Harding

David Harding of Winton Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s analyze the key hedge fund action regarding Ares Commercial Real Estate Corp (NYSE:ACRE).

What does smart money think about Ares Commercial Real Estate Corp (NYSE:ACRE)?

At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in ACRE over the last 18 quarters. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

More specifically, Steamboat Capital Partners was the largest shareholder of Ares Commercial Real Estate Corp (NYSE:ACRE), with a stake worth $7.1 million reported as of the end of September. Trailing Steamboat Capital Partners was Millennium Management, which amassed a stake valued at $4.4 million. Callodine Capital Management, Two Sigma Advisors, and Winton Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Callodine Capital Management allocated the biggest weight to Ares Commercial Real Estate Corp (NYSE:ACRE), around 1.42% of its 13F portfolio. Steamboat Capital Partners is also relatively very bullish on the stock, earmarking 1.39 percent of its 13F equity portfolio to ACRE.

Due to the fact that Ares Commercial Real Estate Corp (NYSE:ACRE) has witnessed falling interest from the smart money, we can see that there exists a select few hedge funds who sold off their positions entirely by the end of the first quarter. At the top of the heap, Renaissance Technologies cut the largest position of the “upper crust” of funds followed by Insider Monkey, totaling an estimated $0.6 million in stock, and D. E. Shaw’s D E Shaw was right behind this move, as the fund dumped about $0.4 million worth. These transactions are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Ares Commercial Real Estate Corp (NYSE:ACRE) but similarly valued. We will take a look at Limoneira Company (NASDAQ:LMNR), Alico, Inc. (NASDAQ:ALCO), Bonanza Creek Energy Inc (NYSE:BCEI), and Fulgent Genetics, Inc. (NASDAQ:FLGT). This group of stocks’ market values resemble ACRE’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LMNR 1 210 0
ALCO 8 18950 -1
BCEI 13 47803 -3
FLGT 9 14912 -2
Average 7.75 20469 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 7.75 hedge funds with bullish positions and the average amount invested in these stocks was $20 million. That figure was $20 million in ACRE’s case. Bonanza Creek Energy Inc (NYSE:BCEI) is the most popular stock in this table. On the other hand Limoneira Company (NASDAQ:LMNR) is the least popular one with only 1 bullish hedge fund positions. Ares Commercial Real Estate Corp (NYSE:ACRE) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on ACRE as the stock returned 35.4% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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Disclosure: None. This article was originally published at Insider Monkey.