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Here’s Why Baron Funds Sold its GDS Holdings (GDS) Position

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Baron Funds, an asset management firm, published its “Baron Real Estate Fund” third quarter 2021 investor letter – a copy of which can be downloaded here. A modest decline of 1.66% was delivered by the fund’s institutional shares for the third quarter of 2021, marginally underperforming its primary benchmark index, the MSCI USA IMI Extended Real Estate Index (the “MSCI Real Estate Index”), and the MSCI US REIT Index (the “REIT Index”), which increased 0.10% and 0.75%, respectively. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Baron Funds, in its Q3 2021 investor letter, mentioned GDS Holdings Limited (NASDAQ: GDS) and discussed its stance on the firm. GDS Holdings Limited is a China-based IT service management company with a $10.9 billion market capitalization. GDS delivered a -37.35% return since the beginning of the year, while its 12-month returns are down by -32.93%. The stock closed at $58.67 per share on November 2, 2021.

Here is what Baron Funds has to say about GDS Holdings Limited in its Q3 2021 investor letter:

"GDS Holdings Limited: Following several years of delivering strong shareholder returns for the Fund, we exited our position in GDS, the leading developer and operator of data centers in China. Though we hold management in high regard and believe there is potential for strong long-term growth, we are uncomfortable with the political landscape in China, including the scrutiny of the technology industry. We will continue to monitor developments and perhaps acquire shares again in the future."

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Based on our calculations, GDS Holdings Limited (NASDAQ: GDS) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. GDS was in 38 hedge fund portfolios at the end of the first half of 2021, compared to 40 funds in the previous quarter. GDS Holdings Limited (NASDAQ: GDS) delivered a 3.49% return in the past 3 months.

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 S&P 500 ETFs by 115 percentage points since March 2017 (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.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. Recently we came across a high-growth stock that has tons of hidden assets and is trading at an extremely cheap valuation. We go through lists like the 10 best growth stocks to buy to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.

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