Nicolas T. Geraci – Would you believe me if I told you there was a place where an investor could deduce what stocks leading fund managers are buying or selling? A place other than Wall Street Bets? There is. Some fund managers exceeding annual returns of 40%, and others like them, are legally obligated to publish their securities holdings by filing a Form 13F with the Securities and Exchange Commission (SEC). For investors looking to beat the market, Form 13F filings may serve as a great source of investment ideas. However, investors should be aware of the risks associated with basing investment decisions off Form 13F filings.
What a Form 13F is and those who must file
Form 13F is the reporting form filed by institutional investment managers. An institutional investment manager is an entity that either invests in, or buys and sells, securities for its own account. Institutional investment managers that engage in interstate commerce in the course of their business and that “exercise investment discretion” over $100 million or more in Section 13(f) securities must file a Form 13F. Section 13(f) securities primarily include U.S. exchange-traded stocks, shares of closed-end investment companies, and shares of exchange traded funds (ETFs). Most investors think of stocks like Apple (AAPL), Lululemon (LULU), or Boeing (BA).
Mandatory information included on Form 13F
Among the items Form 13F filings must include are: (1) the issuer name of all Section 13(f) securities in alphabetical order, (2) a description of the class of security listed, (3) the number of shares owned, (4) the fair market value of the securities listed (as of the end of the calendar quarter).
13F filings may nevertheless provide outdated information
The SEC requires filing within 45 days after the end of the calendar quarter. However, the information filed is “as of the end of the calendar quarter.” This provides a 45-day window for information to change between quarter end and filing date. Most managers submit their 13F filings as late as possible to diminish the reliability of the published data in order not to tip off competitors as to their investment strategy. This means investors are looking at stock purchases that are as many as four months old that may or may not be currently held by the fund.
13F filings do not necessarily illustrate a fund’s true position
While funds are required to report stock ownership, put and call options, and more, they are not required to disclose stock they have sold short nor are funds required to subtract short positions from long positions. This means there is no legitimate method of distinguishing a long position from a mere “hedge.” For example, an investor may note ownership of Apple call options from a 13F filing. However, a fund manager may nevertheless have a much larger short position. In this case, the fund manager is expecting Apple stock to decline but has bought the call options to “hedge” in the event the stock continues to move north. At the same time, an unsuspecting investor could interpret the 13F filing as a vote of confidence in Apple stock when the fund manager actually expects the stock price to decline.
Highlighting the risk of relying on 13F filings
Consider the following hypothetical: Hedge Fund A files a Form 13F 45 days after the conclusion of Q1 showing ownership of 10,000 shares of Lululemon. Forty-five days after the conclusion of Q2, Hedge Fund A files another Form 13F this time showing ownership of 50,000 shares of Lululemon (LULU). What can be deduced?
An investor may assume that Hedge Fund A’s confidence in Lululemon has improved 5X. However, it is equally possible that Hedge Fund A increased its exposure in Lululemon to hedge its large short position. It is also possible that between quarter end and filing of the Form 13F that Hedge Fund A has closed its position, added to it, or taken other measures to hedge against various market conditions.
Form 13F filings give retail investors insight into what institutional investment managers are doing in the market. However, copying the positions indicated by the funds in the filing documents will not produce equal investment returns. Retail investors should be aware of the risks associated with basing investment decisions from Form 13F filings, perform their own due diligence, and invest in accordance with their own risk parameters.