Will the new coronavirus cause a recession in US in the next 6 months? On February 27th, we put the probability at 75% and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Ares Capital Corporation (NASDAQ:ARCC).
Ares Capital Corporation (NASDAQ:ARCC) has seen a decrease in support from the world’s most elite money managers in recent months. Our calculations also showed that ARCC isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Ray Dalio of Bridgewater Associates
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s go over the new hedge fund action surrounding Ares Capital Corporation (NASDAQ:ARCC).
How are hedge funds trading Ares Capital Corporation (NASDAQ:ARCC)?
At the end of the fourth quarter, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards ARCC over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Ares Capital Corporation (NASDAQ:ARCC) was held by D E Shaw, which reported holding $95.9 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $66.3 million position. Other investors bullish on the company included Clough Capital Partners, Millennium Management, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Lee Capital Management allocated the biggest weight to Ares Capital Corporation (NASDAQ:ARCC), around 2.41% of its 13F portfolio. Clough Capital Partners is also relatively very bullish on the stock, designating 1.73 percent of its 13F equity portfolio to ARCC.
Since Ares Capital Corporation (NASDAQ:ARCC) has witnessed falling interest from the smart money, it’s safe to say that there is a sect of funds that elected to cut their entire stakes heading into Q4. Interestingly, Matthew Hulsizer’s PEAK6 Capital Management dumped the largest position of the 750 funds tracked by Insider Monkey, totaling an estimated $2.5 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund said goodbye to about $0.8 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 1 funds heading into Q4.
Let’s go over hedge fund activity in other stocks similar to Ares Capital Corporation (NASDAQ:ARCC). We will take a look at Peloton Interactive, Inc. (NASDAQ:PTON), Assurant, Inc. (NYSE:AIZ), Santander Consumer USA Holdings Inc (NYSE:SC), and Huaneng Power International Inc (NYSE:HNP). All of these stocks’ market caps match ARCC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PTON | 30 | 383046 | 3 |
| AIZ | 25 | 886201 | -5 |
| SC | 27 | 845363 | 2 |
| HNP | 3 | 2790 | -1 |
| Average | 21.25 | 529350 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $529 million. That figure was $262 million in ARCC’s case. Peloton Interactive, Inc. (NASDAQ:PTON) is the most popular stock in this table. On the other hand Huaneng Power International Inc (NYSE:HNP) is the least popular one with only 3 bullish hedge fund positions. Ares Capital Corporation (NASDAQ:ARCC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately ARCC wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ARCC were disappointed as the stock returned -31.8% during the same time period 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 this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
