During the fourth quarter the Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by nearly 7 percentage points as investors worried over the possible ramifications of rising interest rates. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only 298 S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of Equity Residential (NYSE:EQR) and see how the stock is affected by the recent hedge fund activity.
Hedge fund interest in Equity Residential (NYSE:EQR) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare EQR to other stocks including Corning Incorporated (NYSE:GLW), MPLX LP (NYSE:MPLX), and AvalonBay Communities Inc (NYSE:AVB) to get a better sense of its popularity.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 32 percentage points since May 2014 through March 12, 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.
We're going to view the key hedge fund action surrounding Equity Residential (NYSE:EQR).
How have hedgies been trading Equity Residential (NYSE:EQR)?
At the end of the fourth quarter, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2018. On the other hand, there were a total of 17 hedge funds with a bullish position in EQR a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Millennium Management was the largest shareholder of Equity Residential (NYSE:EQR), with a stake worth $75.2 million reported as of the end of September. Trailing Millennium Management was Renaissance Technologies, which amassed a stake valued at $56.1 million. AQR Capital Management, Adage Capital Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
Due to the fact that Equity Residential (NYSE:EQR) has experienced declining sentiment from the smart money, logic holds that there exists a select few funds that elected to cut their entire stakes heading into Q3. It's worth mentioning that Dmitry Balyasny's Balyasny Asset Management dumped the biggest investment of the "upper crust" of funds tracked by Insider Monkey, comprising about $43.2 million in stock. Greg Poole's fund, Echo Street Capital Management, also dropped its stock, about $8.3 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks similar to Equity Residential (NYSE:EQR). We will take a look at Corning Incorporated (NYSE:GLW), MPLX LP (NYSE:MPLX), AvalonBay Communities Inc (NYSE:AVB), and State Street Corporation (NYSE:STT). All of these stocks' market caps are closest to EQR's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GLW,30,456523,3 MPLX,11,331776,0 AVB,27,955741,1 STT,32,910556,-3 Average,25,663649,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $664 million. That figure was $290 million in EQR's case. State Street Corporation (NYSE:STT) is the most popular stock in this table. On the other hand MPLX LP (NYSE:MPLX) is the least popular one with only 11 bullish hedge fund positions. Equity Residential (NYSE:EQR) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Hedge funds were also right about betting on EQR, though not to the same extent, as the stock returned 13.3% and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.