45 days after the end of any given quarter financial television programs and bloggers race to be the first to report the holdings of – insert name of big hedge fund here. They analyze the report to see what the hedge fund managers are buying and selling. However, the question remains – is there any real value in these filings for investors on the outside looking in?
First, it is important to know what the Form 13F covers. Once a quarter, hedge funds and asset managers with greater than $100 million in assets under management are required to report their holdings. The list includes exchange-traded or NASDAQ-quoted stocks, equity options and warrants, shares of closed in funds shares of closed-end investment companies, and certain convertible debt securities. Short positions are NOT included in the 13F. In addition, managers can request confidential treatment of their filing if they feel that their strategy would be compromised by the disclosure. This includes circumstances where the manager has an ongoing acquisition or disposition program. Confidential treatment can last for three months to one year. Lastly, it is important to note that the 13F must be filed no later than 45 days after the end of the quarter. Most funds wait until the deadline to report, as such they are lagging indicators.
Paulson & Co. was known a merger arbitrage fund before he was thrust into the limelight. You may recall, John Paulson famously earned $3.7 billion in compensation during the dark days of the financial crisis. As we all now know, the primary source of the fund’s performance which earned him that princely compensation was his bets against the housing market and the now infamous ABACUS 2007-AC1 CDO. This may come as a surprise to all of those 13F hawks because there was no sign of this investment in 13F filings for Paulson & Co. In fact, Paulson notes that he was not known as an “experienced mortgage investor before 2007” in his recent letter to Limited Partners explaining the ABACUS deal.
I took a look at Paulson & Co’s 13F filings from 2006 to 2007 – his reported holdings at December 2006 totaled $4.9 billion and his largest long equity position was Mirant at over $470 million (inclusive of the warrants). This investment turned out to be a winner appreciating 23.5% over the year while the S&P 500 returned a meager 4.2%. However, another of his large investments was Boston Scientific ($412 million). That stock declined 32.3% during that same period based on the December 2007 13F. You may find it strange that a hedge fund with approximately $28 billion in assets only has $4.9 billion in publicly traded equities.
There is plenty that the 13F doesn’t reveal about the respective manager’s strategy. By not disclosing short positions, swaps and fixed income securities, outsiders will not be able to fully ascertain the extent to which a hedge fund is, well, hedged. Further, the 13F does not disclose positions in commodities, currencies, futures or other markets. Then there is turnover of some of the “fast money” shops that an outsider may not be able to match. In fact, of the top 10 holdings at year end 2006, only 2 were still there at the end of 2007 (Boston Scientific and Mirant). Further, of the top 10 holdings, only 3 were still there in the March filing. This means from the time the December filing was available to the public on February 16th, the fund was already unloading shares of 7 of the other top 10 holdings. In fact, Alcoa, AG Edwards, Kinross Gold, and Thermo Fisher Scientific were the only other names that lasted beyond just one quarter (of top 10 holdings). Thus, it’s quite likely 13F chasers were buying what the fund was selling over the next month and a half (buyer beware!).
Yes, there are insights you may be able to take away from the filings, I don’t dispute that fact. However, the quarterly race to analyze these reports is nothing more than an act of financial voyeurism. You would be better served trolling Schedule 13D’s which must be filed within 10 days of acquiring beneficial ownership of 5% or more of any class of publicly traded securities of a publicly company. For the most part, 13 D filers tend to be longer term holders. Remember, the hype machine is trying to generate page views, not alpha. On Wall Street there are no short cuts – you should do your own homework before blindly chasing stocks that appear in 13Fs.