Beware the Temptation to Follow Hedge Funds' 13F Filings

January 03, 2013   Stephen Taub

Scrutinize the 13F filings, but don't treat them as a valuable tool that will enable you to invest — or perform — like the smart money set

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 year-end).

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

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