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Were Hedge Funds Right About Betting On Mid America Apartment Communities (MAA)?

Asma UL Husna

Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' stock picks rather than directly investing in hedge funds. 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 Mid America Apartment Communities Inc (NYSE:MAA).

Is Mid America Apartment Communities Inc (NYSE:MAA) a buy here? The best stock pickers are turning bullish. The number of bullish hedge fund positions increased by 6 recently. Our calculations also showed that MAA isn't among the 30 most popular stocks among hedge funds. MAA was in 21 hedge funds' portfolios at the end of December. There were 15 hedge funds in our database with MAA holdings 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' 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.

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Let's check out the latest hedge fund action encompassing Mid America Apartment Communities Inc (NYSE:MAA).

What have hedge funds been doing with Mid America Apartment Communities Inc (NYSE:MAA)?

At Q4's end, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 40% from one quarter earlier. On the other hand, there were a total of 22 hedge funds with a bullish position in MAA a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

MAA_mar2019

When looking at the institutional investors followed by Insider Monkey, Jim Simons's Renaissance Technologies has the most valuable position in Mid America Apartment Communities Inc (NYSE:MAA), worth close to $141.4 million, comprising 0.2% of its total 13F portfolio. Coming in second is Diamond Hill Capital, managed by Ric Dillon, which holds a $59.5 million position; 0.3% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that hold long positions consist of Ken Fisher's Fisher Asset Management, Israel Englander's Millennium Management and Phill Gross and Robert Atchinson's Adage Capital Management.

As industrywide interest jumped, key money managers were leading the bulls' herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the biggest position in Mid America Apartment Communities Inc (NYSE:MAA). Arrowstreet Capital had $2.6 million invested in the company at the end of the quarter. D. E. Shaw's D E Shaw also made a $0.9 million investment in the stock during the quarter. The other funds with new positions in the stock are Paul Tudor Jones's Tudor Investment Corp, Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners, and Jeffrey Furber's AEW Capital Management.

Let's also examine hedge fund activity in other stocks similar to Mid America Apartment Communities Inc (NYSE:MAA). These stocks are Atmos Energy Corporation (NYSE:ATO), Arch Capital Group Ltd. (NASDAQ:ACGL), Universal Health Services, Inc. (NYSE:UHS), and Martin Marietta Materials, Inc. (NYSE:MLM). All of these stocks' market caps resemble MAA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ATO,25,327214,10 ACGL,13,943212,-4 UHS,28,735233,-4 MLM,34,1960173,1 Average,25,991458,0.75 [/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 $991 million. That figure was $300 million in MAA's case. Martin Marietta Materials, Inc. (NYSE:MLM) is the most popular stock in this table. On the other hand Arch Capital Group Ltd. (NASDAQ:ACGL) is the least popular one with only 13 bullish hedge fund positions. Mid America Apartment Communities Inc (NYSE:MAA) 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 MAA, though not to the same extent, as the stock returned 13.6% and outperformed the market as well.

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

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