Hedge Funds Are Buying Ares Capital Corporation (ARCC)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. In this article we look at what those investors think of Ares Capital Corporation (NASDAQ:ARCC).

Ares Capital Corporation (NASDAQ:ARCC) shareholders have witnessed an increase in support from the world’s most elite money managers recently. ARCC was in 26 hedge funds’ portfolios at the end of March. There were 22 hedge funds in our database with ARCC positions at the end of the previous quarter. Our calculations also showed that ARCC isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like these. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s review the new hedge fund action encompassing Ares Capital Corporation (NASDAQ:ARCC).

How are hedge funds trading Ares Capital Corporation (NASDAQ:ARCC)?

Heading into the second quarter of 2020, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 18% from the previous quarter. On the other hand, there were a total of 22 hedge funds with a bullish position in ARCC a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Among these funds, D E Shaw held the most valuable stake in Ares Capital Corporation (NASDAQ:ARCC), which was worth $34 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $24.7 million worth of shares. Two Sigma Advisors, Citadel Investment Group, and Callodine 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 Tegean Capital Management allocated the biggest weight to Ares Capital Corporation (NASDAQ:ARCC), around 12.18% of its 13F portfolio. Callodine Capital Management is also relatively very bullish on the stock, setting aside 2.85 percent of its 13F equity portfolio to ARCC.

Now, key hedge funds have jumped into Ares Capital Corporation (NASDAQ:ARCC) headfirst. Callodine Capital Management, managed by James Morrow, created the most valuable position in Ares Capital Corporation (NASDAQ:ARCC). Callodine Capital Management had $7 million invested in the company at the end of the quarter. Randall Smith’s Alden Global Capital also initiated a $6.2 million position during the quarter. The other funds with new positions in the stock are Thomas G. Maheras’s Tegean Capital Management, Chen Tianqiao’s Shanda Asset Management, and Donald Sussman’s Paloma Partners.

Let’s now review hedge fund activity in other stocks similar to Ares Capital Corporation (NASDAQ:ARCC). These stocks are Sonoco Products Company (NYSE:SON), Credit Acceptance Corp. (NASDAQ:CACC), Tallgrass Energy, LP (NYSE:TGE), and BWX Technologies Inc (NYSE:BWXT). This group of stocks’ market values resemble ARCC’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SON 23 122325 -1
CACC 22 581386 -9
TGE 38 692822 7
BWXT 24 107937 2
Average 26.75 376118 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $376 million. That figure was $129 million in ARCC’s case. Tallgrass Energy, LP (NYSE:TGE) is the most popular stock in this table. On the other hand Credit Acceptance Corp. (NASDAQ:CACC) is the least popular one with only 22 bullish hedge fund positions. Ares Capital Corporation (NASDAQ:ARCC) is not the least popular stock in this group but hedge fund interest is still below 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 8.3% in 2020 through the end of May and still beat the market by 13.2 percentage points. A small number of hedge funds were also right about betting on ARCC as the stock returned 36.8% during the second quarter and outperformed the market by an even larger margin.

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