How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Essex Property Trust Inc (NYSE:ESS) and determine whether hedge funds had an edge regarding this stock.

Is Essex Property Trust Inc (NYSE: ESS)the right investment to pursue these days? The best stock pickers were in a bearish mood. The number of long hedge fund positions went down by 3 lately. Essex Property Trust Inc (NYSE:ESS) was in 28 hedge funds' portfolios at the end of June. The all time high for this statistics is 33. Our calculations also showed that ESS isn't among the30 most popular stocks among hedge funds(click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “ the Starbucks of cannabis ” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 onour websiteto get excerpts of these letters in your inbox. Now we're going to take a gander at the new hedge fund action surrounding Essex Property Trust Inc (NYSE:ESS). What have hedge funds been doing with Essex Property Trust Inc (NYSE:ESS)?

At second quarter's end, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ESS over the last 20 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, D1 Capital Partners held the most valuable stake in Essex Property Trust Inc (NYSE:ESS), which was worth $129 million at the end of the third quarter. On the second spot was Long Pond Capital which amassed $85.2 million worth of shares. Renaissance Technologies, Two Sigma Advisors, and Millennium Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each positionLong Pond Capitalallocated the biggest weight to Essex Property Trust Inc (NYSE:ESS), around 3.36% of its 13F portfolio.Third Avenue Managementis also relatively very bullish on the stock, designating 3.08 percent of its 13F equity portfolio to ESS.

Seeing as Essex Property Trust Inc (NYSE:ESS) has experienced declining sentiment from the smart money, logic holds that there lies a certain "tier" of money managers that elected to cut their entire stakes in the second quarter. It's worth mentioning that Dmitry Balyasny'sBalyasny Asset Managementsold off the biggest position of the "upper crust" of funds tracked by Insider Monkey, worth close to $20.6 million in stock, and Eduardo Abush's Waterfront Capital Partners was right behind this move, as the fund sold off about $13.2 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 3 funds in the second quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Essex Property Trust Inc (NYSE:ESS) but similarly valued. These stocks are Teladoc Health, Inc (NYSE:TDOC), Healthpeak Properties, Inc. (NYSE:PEAK), Tiffany & Co. (NYSE:TIF), Hologic, Inc. (NASDAQ:HOLX), BeiGene, Ltd. (NASDAQ:BGNE), CarMax Inc (NYSE:KMX), and Broadridge Financial Solutions, Inc. (NYSE:BR). All of these stocks' market caps match ESS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TDOC,44,811816,8 PEAK,23,372112,-3 TIF,64,2401546,-5 HOLX,46,1546938,5 BGNE,13,3356980,2 KMX,46,1420392,9 BR,24,193920,-5 Average,37.1,1443386,1.6 [/table]

View table hereif you experience formatting issues.

As you can see these stocks had an average of 37.1 hedge funds with bullish positions and the average amount invested in these stocks was $1443 million. That figure was $552 million in ESS's case. Tiffany & Co. (NYSE:TIF) is the most popular stock in this table. On the other hand BeiGene, Ltd. (NASDAQ:BGNE) is the least popular one with only 13 bullish hedge fund positions. Essex Property Trust Inc (NYSE:ESS) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ESS is 42.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed thattop 10 most popular stocksamong hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 21.3% in 2020 through September 25th and surpassed the market by 17.7 percentage points. Unfortunately ESS wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ESS investors were disappointed as the stock returned -10.9% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out thetop 10 most popular stocksamong hedge funds as most of these stocks already outperformed the market in 2020.

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Disclosure: None. This article was originally published atInsider Monkey.

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