Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018 as investors first worried over the possible ramifications of rising interest rates and the escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only about 60% 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 Digital Realty Trust, Inc. (NYSE:DLR) and see how the stock is affected by the recent hedge fund activity.
Is Digital Realty Trust, Inc. (NYSE:DLR) ready to rally soon? Investors who are in the know are in a bullish mood. The number of bullish hedge fund positions improved by 2 in recent months. Our calculations also showed that DLR 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.
[caption id="attachment_30621" align="aligncenter" width="487"] Cliff Asness of AQR Capital Management[/caption]
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to view the key hedge fund action surrounding Digital Realty Trust, Inc. (NYSE:DLR).
How have hedgies been trading Digital Realty Trust, Inc. (NYSE:DLR)?
At Q2's end, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in DLR over the last 16 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, AEW Capital Management was the largest shareholder of Digital Realty Trust, Inc. (NYSE:DLR), with a stake worth $122.7 million reported as of the end of March. Trailing AEW Capital Management was D E Shaw, which amassed a stake valued at $28.7 million. Osterweis Capital Management, AQR Capital Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
As industrywide interest jumped, key money managers have been driving this bullishness. Renaissance Technologies initiated the most outsized position in Digital Realty Trust, Inc. (NYSE:DLR). Renaissance Technologies had $10.5 million invested in the company at the end of the quarter. Matthew Tewksbury's Stevens Capital Management also made a $3 million investment in the stock during the quarter. The other funds with new positions in the stock are Jeffrey Talpins's Element Capital Management, Perella Weinberg Partners, and Israel Englander's Millennium Management.
Let's go over hedge fund activity in other stocks similar to Digital Realty Trust, Inc. (NYSE:DLR). These stocks are Tencent Music Entertainment Group (NYSE:TME), PACCAR Inc (NASDAQ:PCAR), Sun Life Financial Inc. (NYSE:SLF), and FleetCor Technologies, Inc. (NYSE:FLT). This group of stocks' market caps match DLR's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TME,11,160527,-9 PCAR,27,153937,4 SLF,11,183793,0 FLT,40,1863052,6 Average,22.25,590327,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $590 million. That figure was $264 million in DLR's case. FleetCor Technologies, Inc. (NYSE:FLT) is the most popular stock in this table. On the other hand Tencent Music Entertainment Group (NYSE:TME) is the least popular one with only 11 bullish hedge fund positions. Digital Realty Trust, Inc. (NYSE:DLR) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on DLR as the stock returned 11.1% during the same time frame and outperformed the market by an even larger margin. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.