Investors and journalists like to scrutinize — and,
for investors, mimic — the quarterly filings of hedge
fund stock holdings when they are disclosed to regulators, even
though they are generally filed 45 days after the
quarter’s end. After all, for most observers, this
is as much information and insight they will ever get into a
hedge fund’s portfolio.
In some cases it is a pretty good snapshot of the
manager’s stock holdings, even given the delay. In
fact, we recently reported that in the third quarter, hedge
fund turnover was just 29 percent, according to a Goldman Sachs
report. Looked at another way, 71 percent of securities
reported in the September 30, 2012, 13F filings also appeared
in the June 30 filings.
As tempting as it seems to emulate the smartest
money’s top holdings, a few recent developments
offer cautionary lessons.
For one thing, the hedge fund set is not always so
brilliant. Just look at the 10 stocks that were most widely
held by hedge funds at the end of September. Three of the four
mostly widely held stocks lost money from October through
December. They include Apple, down 19 percent, Google, down
7.14 percent, and Microsoft, down 0.43 percent. Another stock
that ranked among the 10 most widely held by hedge funds
– Qualcomm – was flat.
The other risk of mimicking 13F disclosures is that the
portfolio might materially change by the time the public gets
to see the holdings. A good recent example is Lee
Cooperman’s Omega Advisors. The hedge fund
manager, who was up 25.5 percent last year, discussed his
holdings on CNBC on Wednesday morning – including his
five favorites. Investors who scrutinized
Cooperman’s third quarter holdings when they were
disclosed in the middle of November had no way of discerning
these five were his favorites, because they were not listed in
the 13F filing.
One of the stocks is thinly traded so Cooperman said he was
not comfortable disclosing it until he made his big gains (or
it is disclosed in the next 13f if he bought it before
Another one – Qualicorp, a Brazilian health care
company – is a foreign stock that is not required to
be included in the 13F.
In addition, of the remaining three stocks, at the end of
the third quarter Cooperman did not even have positions in two
of them at the time of the 13F filing —Crocs, the
footwear company, and Tetragon Financial, a thinly traded, $1
billion in market cap Guernsey closed-ended investment company
that is traded on the OTC market.
The fifth of the five stocks he referred to as his favorites
was Chimera Investment, a small mortgage real estate investment
trust (REIT) with a double-digit dividend yield. Cooperman had
a very small position in the stock at the end of the third
quarter and the diligent student of !3F filings had no way of
knowing he suddenly fell in love with this one.
In other words, there was no way an outside investor would
have known about Cooperman’s favorite stocks had
he not shared them on television, let alone perusing the most
recent regulatory filings.
And there is another reason for caution – hedge
funds that want to hide the fact they are building significant
positions can omit these stock from their quarterly 13f and
then file an amended form later on once they are finished
buying the stock.
Does this mean that 13F filings are useless? No. For
example, the third quarter filings would have shown you that
banks accounted for four of the 10 most widely held stocks
— JPMorgan Chase, Citigroup, Bank of America and Wells
Fargo. JPMorgan and Citi posted large gains in the fourth
quarter and BofA’s stock doubled in 2012. And even
though Wells Fargo lost money in the fourth quarter, its stock
was up 20 percent for the full year.
So, the moral is: 13F filings can be a valuable source of
investment intelligence, but don’t treat them as
the last word on what the smart money is up to.
Follow Stephen Taub on Twitter @stephentaub