Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren't very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds' top 20 stock picks easily bested the broader market, at 24.4% compared to 20.4%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn't perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
KKR Real Estate Finance Trust Inc. (NYSE:KREF) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 9 hedge funds' portfolios at the end of June. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Apogee Enterprises, Inc. (NASDAQ:APOG), Compass Diversified Holdings LLC (NYSE:CODI), and Radware Ltd. (NASDAQ:RDWR) to gather more data points. Our calculations also showed that KREF isn't among the 30 most popular stocks among hedge funds (see the video below). 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 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, 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. Let's go over the latest hedge fund action regarding KKR Real Estate Finance Trust Inc. (NYSE:KREF).
How are hedge funds trading KKR Real Estate Finance Trust Inc. (NYSE:KREF)?
At Q2's end, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the first quarter of 2019. On the other hand, there were a total of 5 hedge funds with a bullish position in KREF a year ago. With the smart money's capital changing hands, there exists an "upper tier" of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
The largest stake in KKR Real Estate Finance Trust Inc. (NYSE:KREF) was held by Capital Growth Management, which reported holding $34.5 million worth of stock at the end of March. It was followed by D E Shaw with a $4.1 million position. Other investors bullish on the company included Renaissance Technologies, Millennium Management, and Citadel Investment Group.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Elliott Management. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Weld Capital Management).
Let's check out hedge fund activity in other stocks similar to KKR Real Estate Finance Trust Inc. (NYSE:KREF). These stocks are Apogee Enterprises, Inc. (NASDAQ:APOG), Compass Diversified Holdings LLC (NYSE:CODI), Radware Ltd. (NASDAQ:RDWR), and Alamo Group, Inc. (NYSE:ALG). This group of stocks' market caps match KREF's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position APOG,12,140632,1 CODI,5,7883,1 RDWR,16,316267,-1 ALG,7,185807,-3 Average,10,162647,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $163 million. That figure was $51 million in KREF's case. Radware Ltd. (NASDAQ:RDWR) is the most popular stock in this table. On the other hand Compass Diversified Holdings LLC (NYSE:CODI) is the least popular one with only 5 bullish hedge fund positions. KKR Real Estate Finance Trust Inc. (NYSE:KREF) 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 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. Unfortunately KREF wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); KREF investors were disappointed as the stock returned 0.2% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.