One of the more interesting snapshots of the investing universe is captured by the 13-F filings with the U.S. Securities and Exchange Commission (SEC), which come out 45 days after the end of each quarter. Institutional investors, including hedge funds with more than $100 million in assets, are obliged to file their long U.S. equity positions, other securities such as select options, and some convertible bonds with the SEC at the end of each quarter. The SEC then publishes them for the world to see 45 days later. The $100 million asset threshold captures hedge funds above a moderate size that are investing in U.S. equities whether they are U.S. based or not. Plenty of people find it very interesting and useful to see where the largest and most successful hedge funds are investing. In fact there is now an index that tracks the best-regarded managers’ largest 30 investments as well as an upcoming ETF of the same theme. For example, if one just invested in the top 10 holdings of the hedge fund universe identified in the 13-F filings released on July 15, 2013 and sold them when the next holdings release occurred on November 15, the portfolio would have had a total return of 17.3% (11.6% when you exclude Icahn Enterprises which is in the top ten purely due to Carl Icahn’s own holding of his eponymous holding company). The S&P 500’s return for the same time period was 7.65%.1
13-F: A Game of Cat and Mouse
The 13-F filings of hedge funds have spurred an ongoing game of cat and mouse. Everybody with a high profile knows that their 13-F filings are going to be dissected. These investors hardly have a problem with the world piling into their trades behind them, and sometimes they even take advantage of these trades by subsequently lightening up on their holdings. To further add to the confusion, some of these long positions may be hedges to short exposures, such as put options, where the fund may actually have a negative bias on the individual company. It is for this reason that inferences should not be drawn from the holdings of firms like Susquehanna Investment Group, and other options traders and market makers, which regularly feature in the 13-F data. Regardless of these firms’ opinions on any given company, they are, in general, simply hedging an exposure derived from their dealings in the options and other related markets.
While large funds file considerably more data privately with the SEC, other government agencies in the U.S., and in other jurisdictions, the 13-F filing offers a rare chance for comparative analysis of the equity positions of the hedge fund world in general. At PAAMCO, we have transparency into our own fund investments, and we furthermore have a reasonable idea of what is going on in the broader hedge fund universe. Having an actual external comparison, however, is a very useful tool.
The data from the latest filing on September 30 covers $1.48 trillion worth of U.S. equity holdings spread across 860 filing hedge fund managers. This very non-trivial number represents an average holding of $1.72 billion of long U.S. equities for each reporting hedge fund. While this may seem rather high, it is fair to say an element of distortion is introduced by the quantitative market neutral funds that may be levered multiple times as they can have thousands of names with tiny weights in their portfolios. To put the $1.48 trillion number in perspective, the total market cap of the S&P 500 is nearly $16 trillion (as of November 29) while the total full market capitalization of all listed U.S. stocks is (as measured by the Wilshire 5000) $22.0 trillion (as of November 29). For further comparison, the most recent Hedge Fund Intelligence biannual Global Review estimates that hedge funds around the world manage $2.6 trillion, $1.8 trillion of which is managed out of the U.S..
13-F filings will only show approximately half of the hedge fund books as the 13-F filers are not obliged to show short positions. Also, the number of managers holding many positions is artificially increased by the aforementioned market neutral funds. However, the sum of the dollars invested in each name is a good indication of where hedge fund assets are flowing.
Taking the S&P 500 as a guide, out of aggregate 13-F filings, 46% of the dollars represented are invested in S&P 500 companies. The S&P 500 is approximately 75% of total U.S. market capitalization, so one might infer there is a relative bias away from the large/mega cap companies. However, within the S&P 500 it is relatively unevenly distributed ranging from very popular (e.g., Dollar General: held by 97 funds with ownership of 30% of the shares outstanding) to ignored (e.g., Windstream: held by 20 funds with ownership of 0.57% of the company; though Windstream is certainly not ignored on the short side with a 13.9% short interest as of October 31). The average market cap of the top ten holdings is $159 billion. While on average just over 19% of reporting managers hold each of the top ten holdings, it is hard to draw many conclusions from that. Notably, there is a very distinct technology and financial sector bias within the top ten. As noted before, Icahn Enterprises is a holding company for activist investor Carl Icahn and while it would seem like a very direct example of investors piggybacking on another investor’s ideas, in fact it is Carl Icahn’s own hedge fund which holds just over 88% of this company
It is interesting for us to compare our PAAMCO portfolio to the 13-F filings; only 10% of PAAMCO’s U.S. equity investments are in S&P 500 companies and the average market cap of the top 10 U.S. equity names in the PAAMCO book is $8.5 billion as of September 30, 2013. The PAAMCO top 10 holdings add up to 15.3% of our long equity portfolio and are held on average by two managers out of a possible 41 13-F eligible managers (4.9%). Based on this data, it is apparent that PAAMCO’s managers are more concentrated in top names and that these names are smaller than what the overall hedge fund universe focuses on.
Good trade ideas are limited in number and hard to come by. When a lot of smart people are given more or less the same objective (make money!), the same information (Reg FD!) and the same tools (the market!) they can at times look very similar. However, investors should be careful to make sure that passive hedge fund herd-following is not masquerading (and charging) as active investing. Having a fund with a consistent overlap with the most popular names or with the portfolio of various famous investors’ positions is not value-adding active management.
In general, hedge fund assets are concentrated in the larger cap names, though to be fair, less so than the actual market. However a large weight in mega-cap names is an inevitable result of the sheer size of some of the funds in the hedge fund industry. Don’t forget that the average size of long portfolio in this sample is close to $2 billion. This inhibits the amount of impact smaller market cap investments could possibly have on a portfolio, while also magnifying liquidity issues. Another take-away is that hedge funds seem to like ‘growthier’ names. For example, more staid large-cap investments such as Exxon Mobil or J&J are comparatively ignored in favor of names such as Apple, Facebook or Qualcomm. Finally, it is important to know what is in underlying portfolios and to use that information in a cohesive manner recognizing that there are many different angles one must examine to truly understand risk exposures.
13-F filings throw into relief the use of portfolio transparency; a large part of the hedge fund universe already offers this transparency to larger clients. However for those that don’t, the SEC has done their clients a favor and given them a tool to monitor their hedge fund investments and assess them relative to other hedge funds: 13F filings can be used to monitor crowdedness of individual positions in hedge fund portfolios and risk-manage exposures in times of hedge fund de-leveraging; they can be used to measure overlap between managers in the same portfolio or to independently assess sector weightings independent of different sector categorizations by underlying managers. It is up to investors to make use of this data as an evaluation tool and judge accordingly.
1 Source: Bloomberg
Ronan Cosgrave, CFA, CQF is a Director and Sector Specialist for the Convertible Bond Hedging strategy. He also serves as the Portfolio Manager and main point of contact for certain institutional investor relationships. He is responsible for global manager research and portfolio construction within this sector. Ronan is a member of PAAMCO’s Investment Oversight and Risk Management Committees. Prior to joining PAAMCO, Ronan worked as a Process Engineer at IBM’s Storage Technology Division sites in Silicon Valley, Germany and Ireland. He also did chemical engineering design and commissioning for ProsCon, an Irish engineering and process control consultancy. Ronan received his MBA in Finance and Economics from Columbia Business School, and B. Eng. in Chemical and Process Engineering (Honors) from Cork Institute of Technology.
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