There is some evidence to show that following ‘smart money’ investors can replicate some hedge funds returns (via tracking public 13-F forms) but there are also some big caveats. If you are thinking of using these forms to game the system and track the “smart money”, here are 5 reasons that may give you pause:
- They know that you’re looking, and they can trade against you with their own ‘inside’ information. Some big hedge funds will buy short-term options on the positions that are going to be reported via 13F filings because they know “smart money” chasers will drive it up once reported.
- The information is reported on a 45-day lag (so they might already be out of the position by the time you see it.)
- The information isn’t always accurate. If a hedge fund wants to hide the fact that they own a position, they may leave it out and file an amended form later.
- It’s only required for asset managers that have $100m+ in assets (so you won’t see it for the small-but-mighty emerging managers.)
- It only covers US long equities, options, ADRs and convertibles (so you won’t see short positions, futures, currencies, credit instruments, forwards, swaps or ANY international securities). In other words you will miss any hedges and potentially just get one side of the real trade.
In short, You can trade on 13-Fs but you may be getting (a) misinformation, (b) dangerously incomplete information, or you may be (c) protracting your move in advance and leaving yourself open to be gamed.
The gap can be closed somewhat through including form 3/4 which report within 48 hours when a fund owns 5% or more of the outstanding shares of a particular equity. We have seen the approach of using these filings as a way to replicate core long positions of hedge funds while attempting to minimize fees. Generally it is applied to (i) activist managers or (ii) buy-and-hold long biased managers, as a means of limiting the issues above.
As with any investment approach, one’s individual due-diligence & research is paramount in assessing whether any particular position truly has merit. Buyer beware!