Like everyone else, elite investors make mistakes. Some of their top consensus picks, such as Amazon, Facebook and Alibaba, have not done well in Q4 due to various reasons. Nevertheless, the data show elite investors’ consensus picks have done well on average over the long-term. The top 20 stocks among hedge funds beat the S&P 500 Index ETF by more than 6 percentage points so far this year. Because their consensus picks have done well, we pay attention to what elite funds think before doing extensive research on a stock. In this article, we take a closer look at Ares Capital Corporation (NASDAQ:ARCC) from the perspective of those elite funds.
Ares Capital Corporation (NASDAQ:ARCC) was in 22 hedge funds’ portfolios at the end of the first quarter of 2019. ARCC has seen a decrease in hedge fund interest of late. There were 26 hedge funds in our database with ARCC holdings at the end of the previous quarter. Our calculations also showed that ARCC isn’t among the 30 most popular stocks among hedge funds.
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.
We’re going to take a look at the new hedge fund action encompassing Ares Capital Corporation (NASDAQ:ARCC).
What have hedge funds been doing with Ares Capital Corporation (NASDAQ:ARCC)?
At the end of the first quarter, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in ARCC over the last 15 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were upping their stakes meaningfully (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 $97.8 million at the end of the first quarter. On the second spot was Two Sigma Advisors which amassed $36.5 million worth of shares. Moreover, Clough Capital Partners, Arrowstreet Capital, and Millennium Management were also bullish on Ares Capital Corporation (NASDAQ:ARCC), allocating a large percentage of their portfolios to this stock.
Because Ares Capital Corporation (NASDAQ:ARCC) has faced bearish sentiment from the smart money, it’s easy to see that there was a specific group of hedgies who sold off their entire stakes heading into Q3. Interestingly, Howard Marks’s Oaktree Capital Management sold off the biggest position of the 700 funds tracked by Insider Monkey, worth close to $25.8 million in stock, and Michael Johnston’s Steelhead Partners was right behind this move, as the fund cut about $7.5 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 4 funds heading into Q3.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Ares Capital Corporation (NASDAQ:ARCC) but similarly valued. These stocks are News Corp (NASDAQ:NWS), The Toro Company (NYSE:TTC), TIM Participacoes SA (NYSE:TSU), and Voya Financial Inc (NYSE:VOYA). This group of stocks’ market caps resemble ARCC’s market cap.
|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 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $572 million. That figure was $261 million in ARCC’s case. Voya Financial Inc (NYSE:VOYA) is the most popular stock in this table. On the other hand News Corp (NASDAQ:NWS) is the least popular one with only 10 bullish hedge fund positions. Ares Capital Corporation (NASDAQ:ARCC) 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on ARCC as the stock returned 3.5% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.