Institutional Investor takes a look at whether investors can profit from following top holdings in the 13f filings.
Investors, including hedge fund managers, as well as journalists are fascinated with following the moves of hedge fund managers. This is why there is strong interest in the mandatory quarterly filings of hedge funds and any other person with at least $100 million in U.S. equity-type instruments.
Trouble is, investors have up to 45 days to submit these quarterly filings to the Securities and Exchange Commission, and virtually every hedge fund manager usually waits until the final hours, if not minutes, before pressing “send.”
So, the big question every quarter: Is this data old? Are hedge fund managers known for rapid trading strategies typically out of the stocks by the time their previous quarter-end portfolio becomes public information? And, the ultimate question: Can you make money following these filings?
It all depends.
For one thing, some managers do get into—and bail out altogether from—a sizable amount of their positions from quarter to quarter.
For example, as of the end of the fourth quarter, Steve Cohen’s SAC Capital, known for its rapid trading strategy, took 490 new positions of his total 2145, or nearly 25% of the total. He closed out 452 other positions. That’s a pretty big turnover in one quarter.
At the end of the fourth quarter, 251 of George Soros’s 956 positions were new while 168 positions were sold out altogether.
Jim Simons’ Renaissance Technologies, also known for being a rapid trader, did not turn over its portfolio as aggressively. Part of the reason is the number of individual positions he has. Of the 3189 holdings, “just” 483 were new while 467 were sold out completely by December 31.
On the other hand, just 323, or 11 per cent, of Ken Griffin’s 2855 holdings were new while 259 were sold out completely.
And just 8 of Blue Ridge Capital’s 61 positions were new while 7 were sold out.
So, in many cases you can confidently figure the bulk of a hedge fund manager’s portfolio is still the same 45 days into the new quarter.
Ah, but can you make money getting into the stock that late? Here, the evidence is mixed. I took a look at the 15 stocks most over-weighted by hedge funds, as calculated by Credit Suisse Securities’ quantitative team.
At the end of the third quarter of 2010, four of the 15 stocks changed from the prior quarter while at year-end, three of the prior quarter’s 15 stocks changed. Not too much turnover. But, would you have made money? Here it gets a little tricky.
First, I looked at the performance of the 15 most overweight stocks as of September 30. By the end of the following quarter —December 31 — just three of the 15 stocks went down in price; two just slightly. One other company was acquired within the quarter. The rest went up, in some cases significantly. Citigroup, AutoZone and AutoNation each were up between 20 per cent and 22 per cent.
However, a more significant calculation was how well the stocks fared from November 17—the day you probably were able to trade all of these stocks for the first time after they were publicly disclosed—through the end of the quarter.
In general, you fared almost as well. In one or two cases, the stock had run up a bit by November 17, but still rose by a fair amount from that point through the end of the quarter. In two cases, the stock had fallen from October 1 through November 17, setting investors up for an even larger gain than had they held the stock the entire quarter.
I then looked at the 15 most heavily weighted stocks as of year-end. It turns out the price of 11 of the 15 were higher as of Thursday’s close. Several of the stocks were significantly up.
However, the performance of the stocks from February 17 — the day you probably were able to trade all of these stocks for the first time after they were publicly disclosed — through last Thursday was not as good. Just five of the stocks were up, and most of them by mere pennies. So, the gains were much, much less than had you known the hedge funds’ portfolios at the beginning of the quarter. Of course, we are only talking about a three-week period.
Bottom Line: It is a pretty good strategy to follow the movements of hedge fund managers using the 13f filings.
With this in mind, here are the top Overweight Stocks of hedge funds at year-end:
Coca Cola Enterprises
Source: Credit Suisse Quantitative Equity Research