by Michael Tarsala
I never understood the press obsession with hedge fund disclosures — the filings that tell you the stocks that David Einhorn, Steven Cohen and their peers bought and sold.
They could have long since cashed out by the time there’s an SEC report detailing what they purchased.
And now we know they are hiding their best asset purchases with the SEC’s help.
About a third. That’s how much as a percentage of portfolio value hedge funds obscure from the public, and all with the SEC’s blessing, according to a new paper by researchers at the University of Cologne, Columbia and Georgia State.
Those so-called confidential filings are legally omitted from the From 13F reporting process and are allowed to be updated many months later in some cases with a form amendment.
Why so many secrets?
It’s the confidential holdings that tend to have superior performance, the research suggests. And the hedgies don’t want you following their best trades and investments.
For that matter, the SEC doesn’t either.
The SEC justifies hiding what hedge funds are doing as protecting the public interest. And as with most anything, there is a kernel of truth there. Without confidentiality, certain market moves could in theory reveal the investment strategy and harm the competitive position of hedge funds. And if the strategy of Steve Cohen was known for instance, volatility in the stocks he’s buying could go haywire.
Confidential filings do not even make headlines all that often. The last splash was in November 2011, when Berkshire Hathaway finally revealed its $10.7 billion ownership stake in IBM, a position it accumulated secretly with the SEC’s help over a period of two quarters.
But as the research paper details, confidential treatment happens all the time.
Keep in mind that of the two-thirds of positions we do see, the moves of hedge funds are made public as much as 45 days after the end of the quarter in which they were actually made. So in some cases that’s as much as 19 weeks after a position was taken.
That seems like a hell of a long time to me.
And it’s why following the hedge fund positions that you do see simply does not work.
You would lose about 10% a year if you bought the same stocks that mutual funds and hedge funds did as soon as they disclosed their holdings, according to Thomson Reuters research.
So in light of the latest academic research, I have four remaining questions:
- How the heck is a GURU ETF going to pan out?
- Do hedge funds even need confidentiality given the massive delay already baked into the reporting process?
- Knowing what they do, why does mainstream media still go gaga over 13F filings?
- And why should any investor even pay attention?
