Every quarter the Securities and Exchange Commission (SEC) requires hedge funds to disclose their latest holdings.
The SEC requires that the form, called a 13F, be filed within 45 days of the end of the quarter. Since June 30 was the official end of the second quarter, hedge funds had to disclose their holdings by the end of Aug. 14. Due to their secret nature (and possibly to annoy people) hedge funds usually file the form on the last day permitted under law.
The financial media make a big deal over these filings, and some investors attempt to mimic the buys of great hedge fund managers, but is this a good strategy?
Several assumptions need to be made in order to answer yes to this question; however, these assumptions are proved false.
Assumption number #1: When you buy the holdings on a 13F, you can mimic hedge fund performance.
This assumption is false for several reasons.
First, let’s assume that a great investor like David Einhorn buys Apple (which he actually does own). That information came out on Aug. 14; however, Einhorn might have bought the stock any day between April 1 and June 30. Between that time period, Apple’s stock price ranged between $530 a share and $636 a share, a pretty wide gap. Apple is not a very volatile stock, but one can see the wide range even for a strong tech giant like Apple.
When an investor reads the 13F, they do not know at what price Einhorn bought the security. Furthermore, Einhorn might have sold Apple, but they will not know that until the next 13F comes out in mid-November.
Sometimes people get hold of this type of information before it is public, but it is still useless (and possibly illegal to act on). If we find out Einhorn bought Apple in late May, the stock might decline 5 percent before going up 2 percent on Aug. 15 when the news breaks that Einhorn bought the company.
Second, there are a lot of great money managers out there.
Assumption #2: Because Einhorn likes Apple, that makes it a good buy.
The answer is no. Even the best investors are estimated to be only right about 60 percent of the time.
Furthermore, many great investors sold Apple during the second quarter. One example is Lansdowne Partners, one of Europe’s largest hedge funds, which sold its entire stake of Apple during the quarter. So who does one mimic Einhorn or Lansdowne?
There are many issues here with trying to copy hedge funds. We will try to wrap up the most important ones in next week’s column.
(Disclosure: The author of this article has no position in any securities mentioned.)
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