By Shelley Goldberg, Senior Correspondent
People always complain about the hefty fees hedge fund managers charge investors, but they rarely do anything about it.
Well, now we can.
Did you know that you can use Securities and Exchange Commission (SEC) disclosures to monitor the trends of leading hedge funds? The disclosures are called 13F filings, and they’re public information.
The data revealed from these filings can actually provide insight on how the top fund managers are handling the current valuation. Thus you can, to some extent, replicate the portfolios of some of the best managers.
Free Reports:
And what a better time than now? This past August was painful. Markets were victims to sharply lower values and higher volatility after a deluge of negative data out of China, Korea, Kazakhstan, and other emerging markets, along with collapsing energy prices.
The 13F filings are disclosures that the SEC requires from all money managers who have an investment discretion of over $100 million in marketable securities. These filings are required within 45 days of the end of each quarter and reflect the ownership interests that investment managers hold in companies that trade on U.S. exchanges.
The filings disclose hedge fund long positions in U.S. equity markets, American Depositary Receipts (ADRs), both put and call options, as well as convertible notes.
After all, managers are getting 2% or more of their returns in fees. Why pay them when you can do it yourself?
You can search for and retrieve form 13F filings using the SEC’s EDGAR database. Just enter the money manager’s name in the “company name” field and you’ll see all recently filed 13Fs. Next, use the “latest filings” search function and enter “13F” in the “form type” box.
If you want to dig further, you can check out Schedule 13G, which is used to report a party’s ownership of stock that’s over 5% of the company. Ownership of 5% to 20% in a publicly traded stock is considered to be significant, and therefore must be reported to the public. If the size in the stake exceeds 20%, a 13D must be filed.
Then again, if you would rather not do all that work, let “the whale” do some of it for you.
WhaleWisdom.com is an organization that has formed what’s called the WhaleIndex, which is a long-only index that tracks the highest-conviction stocks held by leading hedge fund managers.
It tracks the 100 most commonly held stocks disclosed on the quarterly 13F regulatory filings of consistently successful managers. The index is equal-weighted and rebalanced on a quarterly basis 46 days after the end of each quarter.
After tracking all managers who file 13F regulatory filings, it then ranks a select number of managers using their proprietary WhaleScore.
There are five attributes a manager must have in order to qualify for a WhaleScore:
To qualify for inclusion in the WhaleIndex, a fund manager must have a one-year average WhaleScore higher than the one-year WhaleScore of the S&P 500 for seven of the last eight quarters.
The Whale 30 and Whale 20 portfolios represents the top 30/20 holdings of the WhaleIndex. The portfolios are equally weighted and rebalanced quarterly 46 days after the end of each quarter.
Additionally, they offer turnover portfolios with a focus on reducing turnover by not replacing stocks that remain in the top 50 holdings of the WhaleIndex. Once a stock falls out of the top 50 holdings, it’s replaced with the most popular stock not currently in the portfolio. Turnover portfolios are equally weighted and rebalanced quarterly
As you can see, year-to-date as well as one-, three-, and five-year returns of the Whale 30 and 20 indices are far superior to the S&P 500.
From a sector allocation standpoint, the Whale 20 Index holds 25% of the portfolio in healthcare and another 25% in information technology, indicating that these are the two hottest sectors to be in.
Finally, there are the dogs of the market. Good news, though; SEC data shows the top sell transactions, too.
In fact, over 60% of activist managers have reduced their U.S. equity exposure over the past 12 months according to data in the most recent 13F quarterly findings of activist managers. Such a move indicates a cautious approach toward domestic equity markets. Likely, after these past two weeks, this percent will be even higher.
It’s very important to acknowledge that 13F only discloses sales of pre-existing longs. Unfortunately, the 13F doesn’t disclose short sales from where the bulk of many equity long-short managers’ profits are driven. And the issue of not disclosing short sales becomes even more pertinent to funds that put on pairs trades or are trying to hedge out certain exposures.
Furthermore, SEC filings don’t disclose cash positions or any other asset class. That means these filings can be highly misleading and must be taken with a grain of salt, or even a bushel, depending on the strategy of the hedge fund manager.
Good investing,
Shelley Goldberg
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