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Here’s What Hedge Funds Think About Digital Realty Trust, Inc. (DLR)

Abigail Fisher

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Index returned approximately 12.1% in the first 5 months of this year (through May 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Digital Realty Trust, Inc. (NYSE:DLR).

Is Digital Realty Trust, Inc. (NYSE:DLR) a buy right now? Prominent investors are in a bearish mood. The number of bullish hedge fund bets shrunk by 7 in recent months. Our calculations also showed that DLR isn't among the 30 most popular stocks among hedge funds. DLR was in 16 hedge funds' portfolios at the end of the first quarter of 2019. There were 23 hedge funds in our database with DLR positions at the end of the previous quarter.

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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

D. E. Shaw

We're going to check out the new hedge fund action regarding Digital Realty Trust, Inc. (NYSE:DLR).

Hedge fund activity in Digital Realty Trust, Inc. (NYSE:DLR)

At Q1's end, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of -30% from the previous quarter. On the other hand, there were a total of 17 hedge funds with a bullish position in DLR a year ago. With hedgies' sentiment swirling, there exists a few notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

DLR_june2019

The largest stake in Digital Realty Trust, Inc. (NYSE:DLR) was held by AEW Capital Management, which reported holding $135 million worth of stock at the end of March. It was followed by Adage Capital Management with a $31 million position. Other investors bullish on the company included AQR Capital Management, Osterweis Capital Management, and D E Shaw.

Due to the fact that Digital Realty Trust, Inc. (NYSE:DLR) has experienced declining sentiment from the aggregate hedge fund industry, logic holds that there exists a select few money managers who were dropping their entire stakes by the end of the third quarter. It's worth mentioning that Israel Englander's Millennium Management cut the biggest stake of all the hedgies watched by Insider Monkey, valued at an estimated $16.8 million in stock, and Greg Poole's Echo Street Capital Management was right behind this move, as the fund dumped about $14 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 7 funds by the end of the third quarter.

Let's go over hedge fund activity in other stocks similar to Digital Realty Trust, Inc. (NYSE:DLR). These stocks are First Data Corporation (NYSE:FDC), Coca-Cola European Partners plc (NYSE:CCEP), Hilton Worldwide Holdings Inc (NYSE:HLT), and Ctrip.com International, Ltd. (NASDAQ:CTRP). This group of stocks' market valuations are closest to DLR's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FDC,57,3760286,5 CCEP,13,289525,-4 HLT,51,3976926,4 CTRP,29,1288524,8 Average,37.5,2328815,3.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.5 hedge funds with bullish positions and the average amount invested in these stocks was $2329 million. That figure was $243 million in DLR's case. First Data Corporation (NYSE:FDC) is the most popular stock in this table. On the other hand Coca-Cola European Partners plc (NYSE:CCEP) is the least popular one with only 13 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on DLR, though not to the same extent, as the stock returned 5.2% during the same time frame and outperformed the market as well.

Disclosure: None. This article was originally published at Insider Monkey.

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