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Ares Management Corp (ARES): Hedge Funds Taking Some Chips Off The Table

Abigail Fisher

In this article we will check out the progression of hedge fund sentiment towards Ares Management Corp (NYSE:ARES) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Ares Management Corp (NYSE:ARES) has experienced a decrease in hedge fund sentiment of late. Our calculations also showed that ARES 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.

According to most shareholders, hedge funds are perceived as unimportant, outdated financial vehicles of the past. While there are greater than 8000 funds with their doors open today, We hone in on the leaders of this group, around 850 funds. It is estimated that this group of investors orchestrate the lion's share of the hedge fund industry's total capital, and by watching their first-class investments, Insider Monkey has unsheathed numerous investment strategies that have historically outperformed Mr. Market. Insider Monkey's flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

[caption id="attachment_677223" align="aligncenter" width="399"] Mick Hellman of HMI Capital[/caption]

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 easiest car rental companies to identify emerging trends that are likely to lead to 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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. With all of this in mind we're going to review the new hedge fund action encompassing Ares Management Corp (NYSE:ARES).

What have hedge funds been doing with Ares Management Corp (NYSE:ARES)?

At Q1's end, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from the fourth quarter of 2019. On the other hand, there were a total of 14 hedge funds with a bullish position in ARES a year ago. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

The largest stake in Ares Management Corp (NYSE:ARES) was held by Royce & Associates, which reported holding $85.9 million worth of stock at the end of September. It was followed by HMI Capital with a $68.3 million position. Other investors bullish on the company included Becker Drapkin Management, Two Sigma Advisors, and Alyeska Investment Group. In terms of the portfolio weights assigned to each position Becker Drapkin Management allocated the biggest weight to Ares Management Corp (NYSE:ARES), around 11.55% of its 13F portfolio. HMI Capital is also relatively very bullish on the stock, dishing out 4.53 percent of its 13F equity portfolio to ARES.

Since Ares Management Corp (NYSE:ARES) has witnessed falling interest from the aggregate hedge fund industry, we can see that there lies a certain "tier" of funds that slashed their full holdings by the end of the first quarter. At the top of the heap, James Parsons's Junto Capital Management sold off the biggest position of all the hedgies watched by Insider Monkey, worth about $13.1 million in stock. Joseph Samuels's fund, Islet Management, also cut its stock, about $7.1 million worth. These transactions are important to note, as total hedge fund interest dropped by 2 funds by the end of the first quarter.

Let's now take a look at hedge fund activity in other stocks similar to Ares Management Corp (NYSE:ARES). These stocks are Bio-Techne Corporation (NASDAQ:TECH), Zendesk Inc (NYSE:ZEN), Annaly Capital Management, Inc. (NYSE:NLY), and Henry Schein, Inc. (NASDAQ:HSIC). All of these stocks' market caps are similar to ARES's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TECH,26,313491,0 ZEN,55,1262714,-6 NLY,27,224564,6 HSIC,35,1058541,-1 Average,35.75,714828,-0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.75 hedge funds with bullish positions and the average amount invested in these stocks was $715 million. That figure was $186 million in ARES's case. Zendesk Inc (NYSE:ZEN) is the most popular stock in this table. On the other hand Bio-Techne Corporation (NASDAQ:TECH) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks Ares Management Corp (NYSE:ARES) is even less popular than TECH. Hedge funds clearly dropped the ball on ARES as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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 13.3% in 2020 through June 25th and still beat the market by 16.8 percentage points. A small number of hedge funds were also right about betting on ARES as the stock returned 27.3% so far in 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.

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