The market has been volatile in the last few months as the Federal Reserve finalized its rate cuts and uncertainty looms over trade negotiations with China. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points over the last 12 months. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, though some funds increased their exposure dramatically at the end of Q3 and the beginning of Q4. In this article, we analyze what the smart money thinks of Ares Management Corporation (NYSE:ARES) and find out how it is affected by hedge funds' moves.
Is Ares Management Corporation (NYSE:ARES) a buy here? The smart money is turning bullish. The number of bullish hedge fund positions inched up by 7 recently. Our calculations also showed that ARES isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). ARES was in 17 hedge funds' portfolios at the end of the third quarter of 2019. There were 10 hedge funds in our database with ARES positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
[caption id="attachment_193003" align="aligncenter" width="450"] Chuck Royce of Royce & Associates[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. Let's take a look at the recent hedge fund action surrounding Ares Management Corporation (NYSE:ARES).
What have hedge funds been doing with Ares Management Corporation (NYSE:ARES)?
At the end of the third quarter, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of 70% from the second quarter of 2019. By comparison, 15 hedge funds held shares or bullish call options in ARES a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Ares Management Corporation (NYSE:ARES) was held by Royce & Associates, which reported holding $104.6 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $41.6 million position. Other investors bullish on the company included Millennium Management, Laurion Capital Management, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Becker Drapkin Management allocated the biggest weight to Ares Management Corporation (NYSE:ARES), around 9.91% of its 13F portfolio. Lee Capital Management is also relatively very bullish on the stock, setting aside 1.75 percent of its 13F equity portfolio to ARES.
As one would reasonably expect, key money managers have jumped into Ares Management Corporation (NYSE:ARES) headfirst. Millennium Management, managed by Israel Englander, initiated the largest position in Ares Management Corporation (NYSE:ARES). Millennium Management had $22.7 million invested in the company at the end of the quarter. Jeffrey Talpins's Element Capital Management also initiated a $4.8 million position during the quarter. The other funds with brand new ARES positions are Steve Cohen's Point72 Asset Management, Simon Sadler's Segantii Capital, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital.
Let's check out hedge fund activity in other stocks similar to Ares Management Corporation (NYSE:ARES). These stocks are Mellanox Technologies, Ltd. (NASDAQ:MLNX), Park Hotels & Resorts Inc. (NYSE:PK), EnCana Corporation (NYSE:ECA), and EPR Properties (NYSE:EPR). This group of stocks' market valuations match ARES's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MLNX,39,1506689,0 PK,19,378136,-6 ECA,25,262404,-7 EPR,18,201024,-2 Average,25.25,587063,-3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $587 million. That figure was $222 million in ARES's case. Mellanox Technologies, Ltd. (NASDAQ:MLNX) is the most popular stock in this table. On the other hand EPR Properties (NYSE:EPR) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Ares Management Corporation (NYSE:ARES) is even less popular than EPR. 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on ARES as the stock returned 23.4% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.