Introduction to using 13(f) Filings as an Investment Tool

Many investors look for help when picking investments. One tool people use is the quarterly filing of institutional investment managers called form 13(f). In 1975, Congress mandated that any institutional investment manager (banks, insurance companies, hedge funds, investment companies, foundations, pensions funds, broker dealers, mutual funds) with over $100 million assets under management have to disclose their holdings to the general public as a way to increase transparency. These companies have to file their 13(f) forms once a quarter. This has led to a group called “coattail investors” who try to mimic the investments of successful hedge funds by following professional hedge fund’s 13(f) filings. One thing to note is that this is only helpful when the reporting company is being honest and accurate (many people lost money following Bernie Madoff’s 13(f) filings). Also, many companies will add top performing stocks right at the end of the quarter to show that they had exposure to those companies, which is called window dressing. Also, these companies are only required to file for long holdings, short holdings are not reported. The 13(f) filing will not show positions or holdings in commodities, currencies or other markets. The 13(f) requires the disclosure of the names of the hedge fund managers, the securities, CUSIP number, numbers of shares and its market value.

It also important to remember that hedge funds are very different than mutual funds. Hedge funds usually place their funds in a much wider range of investments than traditional mutual funds. This can include private placements, commodities, foreign currencies as well as different types of debt. Hedge funds are only open for investment to accredited or qualified investors, which usually have a longer term view and can withstand market fluctuations. All in all, hedge funds tend to be riskier than mutual funds since they are intended to beat the S&P.

Looking at one particular quarter’s 13(f) will give you an idea of where these funds are putting their money but most ‘coattail’ investors will check the filings on a quarter by quarter basis. This way they get a better idea of the trends the hedge fund managers are focusing on as well as see what the funds have bought that quarter (as well as sold). Over time, ‘coattail’ investors begin to see what professional hedge fund managers have as their core holdings.

Generally ‘coattail’ investors only follow the longer term, value oriented funds and not active or heavily traded funds. The reason being that the filings only come out once a quarter and usually have about a 45 day lag from the end of the quarter before being made public.

There are many tools on the internet that allows these investors the opportunity to backtest a particular hedge fund manager and see what the performance would have been by simply mirroring the managers’ positions. Some of these tools will allow ‘coattail’ investors the opportunity to combine multiple managers (or styles) and see how you would have done.

The SEC has a tool called EDGAR which is the centralized database for these 13(f) filings. ‘Coattail’ investors go there and have the ability to search for particular managers via their name or their style.

We should see increased regulation in hedge funds after the financial crisis of 2008 and the ensuing overhaul in the law. The SEC will require more information to be disclosed about their operations, finances and investors. Hedge funds now account for about 20% of all stock trading and have seen an increase of funds invested in hedge funds in the billions of dollars the past ten years. The new rules will require funds with more money to have stricter regulation requirements and therefore disclose more information.

There is a growing movement among hedge funds managers to apply for exemption status from 13(f) filings. They argue that their holdings constitute ‘trade secrets’ that they don’t want their competition (other hedge funds or investment companies) to know. Also, they say that the same investors this requirement is intended to help will hurt them in the long run since less and less investors will do their own due diligence for these very risky investments.

There is a whole cottage industry devoted to superstar investors like Warren Buffet, but there are many hedge fund managers out there who you should look at their 13(f) filing. One of the best performing hedge fund managers over the past few years has been John Paulson who runs the Paulson Credit Opportunities Fund. From 2006-2009, Paulson was able to see a compounded return well over 100%. Paulson runs over $32 billion in assets and actually has a couple of his funds consistently in the Barrons’ Top 100. Paulson is probably best known for forecasting the fallout in the subprime housing market as well as helping pick the securities in Goldman Sachs failed debt obligation that cost investors quite a bit.

Another manager worth examining is James Melcher who runs Balestra Capital Partners. Balestra Capital is a global macro fund which focuses on the impact of economic, political and social events. Melcher looks to take on calculated risks while protecting investor capital. We would also recommend people paying attention to what George Soros, Ray Dalio as well as Moore Capital.

In conclusion, the SEC has intended the 13(f) filings as a way to increase transparency for retail investors. The idea is to make the holdings of professional hedge fund managers available to investors, so that they can see what the pros are doing and mimic the pros, if they want. It is very important to remember that hedge funds are intended to be riskier investments for accredited investors. Plus, the 13(f) filings only tell investors what stocks the fund is long, which very well could be a small part of their portfolio. Individual hedge funds are not required to disclose commodity holdings, currency holdings, private placement deals, real estate or what stocks they are short. Although there many tools available to ‘coattail’ investors online, nothing replace your individual due diligence for your own portfolio (nobody cares for your money more than you).