How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding TPG RE Finance Trust, Inc. (NYSE:TRTX) and determine whether hedge funds had an edge regarding this stock.
TPG RE Finance Trust, Inc. (NYSE:TRTX) investors should pay attention to an increase in hedge fund interest recently. TRTX was in 17 hedge funds' portfolios at the end of March. There were 15 hedge funds in our database with TRTX positions at the end of the previous quarter. Our calculations also showed that TRTX 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.
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 S&P 500 ETFs by more than 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Bruce Kovner of Caxton Associates LP
At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let's take a gander at the key hedge fund action surrounding TPG RE Finance Trust, Inc. (NYSE:TRTX).
What have hedge funds been doing with TPG RE Finance Trust, Inc. (NYSE:TRTX)?
At Q1's end, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 13% from the previous quarter. On the other hand, there were a total of 11 hedge funds with a bullish position in TRTX a year ago. With hedge funds' capital changing hands, there exists a few notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of TPG RE Finance Trust, Inc. (NYSE:TRTX), with a stake worth $8.6 million reported as of the end of September. Trailing Renaissance Technologies was D E Shaw, which amassed a stake valued at $4.1 million. Balyasny Asset Management, Millennium Management, and Two Sigma Advisors 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 Indaba Capital Management allocated the biggest weight to TPG RE Finance Trust, Inc. (NYSE:TRTX), around 0.68% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, designating 0.2 percent of its 13F equity portfolio to TRTX.
As industrywide interest jumped, key hedge funds have been driving this bullishness. Balyasny Asset Management, managed by Dmitry Balyasny, assembled the biggest position in TPG RE Finance Trust, Inc. (NYSE:TRTX). Balyasny Asset Management had $3.9 million invested in the company at the end of the quarter. Derek C. Schrier's Indaba Capital Management also initiated a $1.3 million position during the quarter. The following funds were also among the new TRTX investors: Greg Eisner's Engineers Gate Manager, Tom Wagner and Ara Cohen's Knighthead Capital, and Bruce Kovner's Caxton Associates LP.
Let's now take a look at hedge fund activity in other stocks similar to TPG RE Finance Trust, Inc. (NYSE:TRTX). These stocks are Amyris Inc (NASDAQ:AMRS), Arrow Financial Corporation (NASDAQ:AROW), Huize Holding Limited (NASDAQ:HUIZ), and Verastem Inc (NASDAQ:VSTM). This group of stocks' market caps resemble TRTX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMRS,10,30419,0 AROW,4,13074,-1 HUIZ,1,262,1 VSTM,17,173703,9 Average,8,54365,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8 hedge funds with bullish positions and the average amount invested in these stocks was $54 million. That figure was $29 million in TRTX's case. Verastem Inc (NASDAQ:VSTM) is the most popular stock in this table. On the other hand Huize Holding Limited (NASDAQ:HUIZ) is the least popular one with only 1 bullish hedge fund positions. TPG RE Finance Trust, Inc. (NYSE:TRTX) 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 18.6% in 2020 through July 27th but still beat the market by 17.1 percentage points. Hedge funds were also right about betting on TRTX as the stock returned 57.2% since Q1 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.