Smart Money Piggybacking | Using SEC filings To Piggyback Hedge Funds | Piggybacking Legendary Investors
Smart Money Piggybacking | Using SEC filings To Piggyback Hedge Funds and Legendary Investors
You work hard for your money and want that money to work hard for you. But putting that money to work in the stock market can be risky, in part, because your not an expert stock picker. In fact, academic research has shown that most individual investors are not good at picking stocks. Undoubtedly, excellent individual stock pickers exist, but odds are, your not one of them. However, just like any other profession, there are experts in this field, experts whose stock picks have a proven record of beating the market year after year. Experts that eat, sleep, and breathe stocks. These professional money managers run mutual or hedge funds and are skilled in valuing stocks and maximizing returns. Wouldn’t it be great to get stock picks from these top money managers? Doesn't it make sense for individual investors to track professional hedge fund managers and cherry-pick their best stock ideas?
Introduction to Piggybacking
As hedge fund and mutual fund managers are experts in stock picking and risk mitigation, it would make sense to get stock picks from top performing managers. If you could peer into the investment portfolio of legendary investors, such as Warren Buffett, (who is often regarded as the greatest investor of all time, having attained a personal net worth of over $50 billion and returned an annualized gain from 1964 to 2010 of 20.2% vs an average of 10.3% for the S&P500 including dividends) then you could piggyback on his best investment ideas and use them in your own portfolio. To achieve returns north of 20% per year for over 45 years it is obvious that Mr. Buffett knows a thing or two about stock picking. With time-tested returns like his who wouldn't want to pick his brain for investment ideas? Thankfully, with piggybacking you can. In fact, tracking hedge fund holdings might be a great start for your due diligence for your next stock purchase.
Piggybacking is the following of smart money, mainly hedge fund managers, and making investment decisions based on the publicly-available SEC filings of these outstanding professional investors. Many individual investors don’t realize, but the stock portfolios of most institutional funds are disclosed to the United States Securities and Exchange Commission (SEC) every quarter and published online for free. Since the hedge fund industry has nearly $2 in assets under management (AUM) they are a very influential part of the market and keeping an eye of the places they are stashing their cash can be helpful to your portfolio.
How Can I Piggyback Great Investors?
The mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and to facilitate capital formation. In order to protect small investors Congress passed Section 13(f) pursuant to the Securities Exchange Act of 1934. The measure requires every institutional fund manager with AUM over $100 million to report its holdings to the SEC every quarter. Also, activists and passive investors that acquire a stake greater than or equal to 5% in any publicly traded company are required to file with the SEC. The thought behind Congress’s decision was the protection of retail investors by improving the disclosure and transparency of institutional firms and thereby increasing confidence in the financial markets. Institutional investors are required to file form 13F (also referred to as 13F-HR) no more than 45 days after the end of the quarter. Thankfully, the electronic versions of these forms are available on the SEC’s Electronic Data Gathering, Analysis and Retrieval (EGAR) database and can be viewed for free. By examining 13F files you can take a glimpse into the stock portfolio of your favorite hedge fund manager and even piggyback on their best investment ideas.
13F SEC Filings | What Information is Reported on Form 13F?
All form 13F filings must include:
- The name of all Section 13(f) stocks owned in alphabetical order
- A description of security class such as common stock, call or put option, preferred shares
- The number of shares owned
- The fair market value of the stocks listed at the end of the quarter
13F SEC Filings | Caveats
Form 13Fs filed by institutional money managers provides a snapshot into the current holdings of the fund but there are some caveats to using these fillings to piggyback the pros:
- The 13F is due 45 days after the end of each quarter and therefore is not an accurate representation of “current” holdings because the fund manager could have sold out of a position
- The 13F includes long positions only. This is important because managers often take short stock positions in the same securities that they own in order to hedge risk, so actual long exposure can be overestimated
- Long call or put options (on 13F securities) must be included with the value of the stock, but options that are sold (such as covered calls) are not disclosed
- Positions with less than 10,000 shares or less than $200,000 in value are not disclosued
- Foreign shares or ADRs are not included unless found on the Official List of Section 13(f) Securities
The actual data present in filed form 13s can be limited and misleading as not all stock exposure must be reported. However, these fillings still present a great opportunity for individual investors to discover which stocks the hedge fund industry is piling money into. For example, if you notice the top ten hedge funds have been increasing their positions in Apple, you might want to consider doing some research on Apple to see if it might fit well in your portfolio. In fact, even major banks follow hedge funds. Goldman Sachs started tracking hedge fund holding in 2006 and currently monitors nearly 700 hedge funds with assets over $1 trillion.
Piggybacking | Getting Started
Electronic versions of Form 13Fs are posted on the SEC EDGAR website and are available to the public for free. Simply head to the website and search for your favorite fund. It’s a good idea to compare the same disclosures from previous quarters to see how a funds position has changed. If a fund has dramatically increased a position from the previous quarter it is likely they are becoming more bullish on that position and could warrant some research on your part. Additionally, I recommend adding your favorite fund’s SEC RSS feed to your google reader account. This allows you to be notified immediately when the SEC posts a new file. Setting it up is simple.
- Open an account with Google and head to the Google Reader section.
- Make a folder calling it “Hedge Fund” or “Piggybacking”.
- In a new window head to the SEC EDGAR site
- Search for your favorite fund, for example Berkshire Hathaway Inc by name or CIK number
- Click on the corresponding CIK number to view fund filings
- Click RSS Feed and copy address
- Go back to Google Reader and hit “add subscription
- Paste link and hit OK
Now when the SEC publishes a new form it will instantly appear in your Google Reader which you can view on your laptop or smartphone.
Who should I follow?
Now that you know how to find and track 13F filings, the question becomes, who should you follow? Here is a compilation of a few managers that might be worth your time. I’ll even toss in a link to their filings on the SEC EDGAR website.
- Warren Buffet - Berkshire Hathaway Inc
- Sleth Klarman - Baupost Group LLC
- George Soros - Soros Fund Management
- Bruce Berkowitz - Fairholme Capital Management
- David Einhorn - Greenlight Capital LLC
If your not comfortable reading a Form 13F and interpreting holdings, but would like to know what your favorite fund manager has been buying you can check out sites like Alphaclone.com and marketfolly.com. Alphaclone will allow you to mimic your favorite manager without actually combing through the filings yourself. Marketfolly provides a great summary of newly filed forms with a quick breakdown of how the fund’s manager is positioned.
With the SEC EDGAR website it is possible to view a snapshot of many institutional funds holdings by examining 13F filings. While comparing quarter to quarter filings will allow you to get a general idea of what stocks the fund’s manager has been accumulating, it is important to remember not to read too much into a particular filing because there can be parts of the trade that are not disclosed such as short positions and sold options. These can dramatically affect the actual risk and exposure of the fund. In conclusion, 13F filings can be used to cherry-pick stock ideas from legendary investors, but remember to use the fillings for ideas and to still do your own research before making any purchases.
If you have your own fund manager that you track, let me know in the comments below. And don't forget to follow me on Twitter @Enni82.
- Find the smart money AlphaClone
AlphaClone enables you to access alpha-generating stock ideas and investment strategies by following the moves of the world's top hedge fund managers.
- market folly : hedge fund portfolio tracking, stock market analysis, and macro commentary
Get place to get started with SEC filings.
- Division of Investment Management: FAQ About Form 13F
SEC Website with FAQ regarding the form 13F. Great start to understanding how to read 13F filings.