Here’s What Hedge Funds Think About Ares Commercial Real Estate Corp (ACRE)

Reymerlyn Martin

Sat, Jun 29, 2019, 6:20 PM

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of 6 percentage points during the first 5 months of 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Ares Commercial Real Estate Corp (NYSE:ACRE).

Is Ares Commercial Real Estate Corp (NYSE:ACRE) a buy, sell, or hold? The best stock pickers are getting more optimistic. The number of bullish hedge fund bets moved up by 5 recently. Our calculations also showed that ACRE isn't among the 30 most popular stocks among hedge funds.

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.

We're going to go over the key hedge fund action encompassing Ares Commercial Real Estate Corp (NYSE:ACRE).

How have hedgies been trading Ares Commercial Real Estate Corp (NYSE:ACRE)?

Heading into the second quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 100% from the fourth quarter of 2018. On the other hand, there were a total of 7 hedge funds with a bullish position in ACRE a year ago. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

More specifically, Millennium Management was the largest shareholder of Ares Commercial Real Estate Corp (NYSE:ACRE), with a stake worth $7.6 million reported as of the end of March. Trailing Millennium Management was Marshall Wace LLP, which amassed a stake valued at $5.5 million. Renaissance Technologies, Two Sigma Advisors, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.

As one would reasonably expect, key hedge funds have jumped into Ares Commercial Real Estate Corp (NYSE:ACRE) headfirst. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, assembled the most outsized position in Ares Commercial Real Estate Corp (NYSE:ACRE). Marshall Wace LLP had $5.5 million invested in the company at the end of the quarter. David Harding's Winton Capital Management also made a $0.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Peter Algert and Kevin Coldiron's Algert Coldiron Investors, Bruce Kovner's Caxton Associates LP, and Gavin Saitowitz and Cisco J. del Valle's Springbok Capital.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Ares Commercial Real Estate Corp (NYSE:ACRE) but similarly valued. These stocks are Sentinel Energy Services Inc. (NASDAQ:STNL), Community Health Systems (NYSE:CYH), CAI International Inc (NYSE:CAI), and Senseonics Holdings, Inc. (NYSEAMEX:SENS). This group of stocks' market caps are similar to ACRE's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STNL,15,160888,-1 CYH,18,51979,-8 CAI,16,112720,-1 SENS,10,5479,-4 Average,14.75,82767,-3.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $83 million. That figure was $25 million in ACRE's case. Community Health Systems (NYSE:CYH) is the most popular stock in this table. On the other hand Senseonics Holdings, Inc. (NYSEAMEX:SENS) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Ares Commercial Real Estate Corp (NYSE:ACRE) is even less popular than SENS. Hedge funds dodged a bullet by taking a bearish stance towards ACRE. Our calculations showed that the top 20 most popular hedge fund stocks returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately ACRE wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ACRE investors were disappointed as the stock returned 0.9% during the same time frame 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 13 of these stocks already outperformed the market so far in the second quarter.

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

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