Is AvalonBay Communities Inc (NYSE:AVB) a good bet right now? We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
AvalonBay Communities Inc (NYSE:AVB) has experienced a decrease in activity from the world’s largest hedge funds in recent months. Our calculations also showed that AVB isn’t among the 30 most popular stocks among hedge funds.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s view the recent hedge fund action encompassing AvalonBay Communities Inc (NYSE:AVB).
What have hedge funds been doing with AvalonBay Communities Inc (NYSE:AVB)?
Heading into the third quarter of 2019, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AVB over the last 16 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in AvalonBay Communities Inc (NYSE:AVB) was held by AEW Capital Management, which reported holding $211.1 million worth of stock at the end of March. It was followed by Renaissance Technologies with a $196 million position. Other investors bullish on the company included AQR Capital Management, Adage Capital Management, and D E Shaw.
Due to the fact that AvalonBay Communities Inc (NYSE:AVB) has faced bearish sentiment from the smart money, it’s safe to say that there exists a select few hedgies who were dropping their entire stakes last quarter. Intriguingly, Dmitry Balyasny’s Balyasny Asset Management said goodbye to the biggest stake of the “upper crust” of funds tracked by Insider Monkey, valued at an estimated $29.8 million in stock, and Richard Driehaus’s Driehaus Capital was right behind this move, as the fund sold off about $1.4 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 5 funds last quarter.
Let’s also examine hedge fund activity in other stocks similar to AvalonBay Communities Inc (NYSE:AVB). These stocks are ONEOK, Inc. (NYSE:OKE), Chunghwa Telecom Co., Ltd (NYSE:CHT), The Hershey Company (NYSE:HSY), and Nokia Corporation (NYSE:NOK). This group of stocks’ market values resemble AVB’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $412 million. That figure was $662 million in AVB’s case. The Hershey Company (NYSE:HSY) is the most popular stock in this table. On the other hand Chunghwa Telecom Co., Ltd (NYSE:CHT) is the least popular one with only 3 bullish hedge fund positions. AvalonBay Communities Inc (NYSE:AVB) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on AVB as the stock returned 6.7% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.