Why 13-F filings are Poor for Replicating Funds
I’ve seen hedge fund and trader replication ETFs and strategies for some time now and I realized a lot of them are based on 13-F filings.I thought I would go into why these are poor for replication. I hope it’s helpful for some readers out there. And in case I miss something, please feel free to add some more points.
I originally made this post on Reddit, but decided to put it here as well for the readers of this blog. A few Redditors responded and that is below the “Edit” portion below.
1) They aggregate the positions of many different people
Typically the funds they replicate often have a Portfolio Manager structure. Just like with mutual funds you have many different types of funds, on the hedge fund side, you have something similar except you have a ton of different individuals. The 13-F filings are an aggregation of the entire fund so you are seeing the aggregated thesis of the entire fund. You may also be looking at the position of a portfolio manager who fundamentally looks at the world entirely different than you and understands the company in a context you may not. Some people may view this as “crowdsourcing” within hedge funds, but then I present a couple other points.
2) They are delayed
The filings are quarterly so you are getting lagging data. It’s not uncommon for a fund to change positions every month. If you are using 13-F filings, make sure the fund has very long holding periods to account for this. Even then, if there is market-moving news, you wont really know their position until the next report.
3) They show you an incomplete picture
A long/short equity fund will often have a short component. Traders often use pairs trades, or short trades to come up with a trade structure. 13-F filings though only represent the long position.
For example the 13-F filings may be long comcast, when the fund could also be short Timewarner against it. Both companies make up the trade thesis. So even if Comcast loses money, they may be making money on the entire trade as Timewarner was the other leg of the trade. It may appear they are “in it for the long haul” when really you can only see one side of the trade. It’s true long/short equity funds tend to make more money on the long side, but some of that is beta exposure.
What I have used 13-F filings for
1) Trade idea generation.
Sometimes smaller hedge funds will find stocks that I haven’t heard of. I will do my own research though and form my own thesis. It’s almost like a screener I suppose. If I know if a hedge fund is a value fund, a long position may be a value position.
2) To get a hf gig
In college I would look up 13-F filings for local small hedge funds, then research the companies, and cold E-mail hedge funds to discuss the idea. This tended to be received well.
Did I miss anything?
Here is what Reddit commenters added – please make sure to give them the karma they deserve
>Yes, 13-F following works best for idea generation from funds with very concentrated portfolios and known for mostly long positions.
One metric that isn’t used much that I like to estimate is the % of overall shares of a particular company that the fund holds (not the % it represents of their own portfolio) . This may give you an even better sense of their conviction in the business. When they start owning close to 20% of a company (many don’t go over this limit because of poison pill arrangements and filing requirements), it implies a high level of conviction, even if it’s a relatively smaller portion of their overall portfolio.
(Expanding upon delayed releases)
>Not only that, they will often wait the full 45 day time limit after quarter end to file, so when you see that report you’re already looking 45 day old data.
Could be long the CDS or puts and long the stock to tweak the risk. 13f makes look like the like the position.