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Were Hedge Funds Right About Dumping Digital Realty Trust, Inc. (DLR)?

Reymerlyn Martin

Is Digital Realty Trust, Inc. (NYSE:DLR) a first-rate investment now? Hedge funds are in a bearish mood. The number of bullish hedge fund bets went down by 11 recently. Our calculations also showed that DLR isn't among the 30 most popular stocks among hedge funds. DLR was in 23 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 34 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' 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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We're going to view the latest hedge fund action regarding Digital Realty Trust, Inc. (NYSE:DLR).

What have hedge funds been doing with Digital Realty Trust, Inc. (NYSE:DLR)?

At Q4's end, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -32% from one quarter earlier. By comparison, 17 hedge funds held shares or bullish call options in DLR a year ago. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

DLR_mar2019

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Jeffrey Furber's AEW Capital Management has the largest position in Digital Realty Trust, Inc. (NYSE:DLR), worth close to $127.5 million, corresponding to 4% of its total 13F portfolio. The second largest stake is held by Adage Capital Management, led by Phill Gross and Robert Atchinson, holding a $26.9 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Remaining peers that hold long positions encompass Cliff Asness's AQR Capital Management, John Osterweis's Osterweis Capital Management and Israel Englander's Millennium Management.

Judging by the fact that Digital Realty Trust, Inc. (NYSE:DLR) has witnessed a decline in interest from the smart money, it's easy to see that there were a few hedge funds that elected to cut their entire stakes by the end of the third quarter. Interestingly, Jim Simons's Renaissance Technologies sold off the biggest stake of all the hedgies watched by Insider Monkey, valued at about $26.8 million in stock, and Anand Parekh's Alyeska Investment Group was right behind this move, as the fund dumped about $16.9 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 11 funds by the end of the third quarter.

Let's check out hedge fund activity in other stocks similar to Digital Realty Trust, Inc. (NYSE:DLR). These stocks are The Kroger Co. (NYSE:KR), Twitter Inc (NYSE:TWTR), WEC Energy Group, Inc. (NYSE:WEC), and Coca-Cola European Partners plc (NYSE:CCEP). This group of stocks' market values match DLR's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KR,33,573567,3 TWTR,49,1540956,7 WEC,13,381115,-6 CCEP,17,202952,-6 Average,28,674648,-0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 28 hedge funds with bullish positions and the average amount invested in these stocks was $675 million. That figure was $268 million in DLR's case. Twitter Inc (NYSE:TWTR) is the most popular stock in this table. On the other hand WEC Energy Group, Inc. (NYSE:WEC) 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. 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. Unfortunately DLR wasn't in this group. Hedge funds that bet on DLR were disappointed as the stock returned 9.2% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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

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