There is something extremely reassuring about having our biases confirmed, and that is the only reason I can see for the general fascination that surrounds the quarterly filing of hedge fund positions with the SEC. The disclosure forms, known as 13F filings, always attract attention but in reality they tell us nothing for several reasons.
They are a snapshot of the holdings of hedge funds at the close of the quarter that were released yesterday. In other words, by the time we see the information it is already 45 days out of date, and 45 days is a lifetime in a trading environment. If hedge funds were known for their tendency toward long term investment then that would be quite informative, but this is hedge funds we’re talking about; hardly bastions of patience or decade long outlooks.
There are exceptions, of course; Warren Buffet’s Berkshire Hathaway (BRKA, BRKB), for example, is known for long term investing and, given their overall success, their current thinking should be of interest. Even there, though, the time lag between reporting and release can skew a position if we don’t know the logic behind it. Part of a holding could be sold after a strong run up with every intention of buying it back on a correction, for example; we just don’t know. The level of holding on June 30th could be no indication at all of Berkshire’s view of a company in the long term.
With those that trade actively, of course, the problem is even more pronounced. I have never worked at a hedge fund, but I have spent most of my life in a dealing room, and let me tell you something I learned... Don’t trust the information that a trader gives you when he or she knows that information will be available. I am not a huge conspiracy theorist, but knowing that your positions must be declared on a certain day, do you think that most traders would make their book at the close of business on that day accurately reflect their strategy and intentions? I know I wouldn’t and I would suggest that if you believe traders are more honest than that, then you are a touch naive.
Yet still we see detailed analysis of these 13f filings every quarter. If traders deliberately misleading by positioning for the required snapshot is a little too conspiratorial for you, then here’s another reason not to read too much into this information. The people making these calls are human, and as such they can be expected to make mistakes.
Exactly three months ago, when David Tepper had cautioned us to not be “too freaking long” I disagreed and the market continued on up, for example. Even more striking is the well publicized fact that George Soros spent most of the second half of 2013 assembling a huge short position in the S&P 500. Looking at this chart, I would guess that didn’t work out too well.
Even then, though, we cannot be sure of the result. If the fund bought back those shorts at the bottom of January’s dip then they probably didn’t do too much damage, but if they got squeezed out at the end of February... The point is, without knowing all of the details of the trade such as the intended time horizon and profit target, we cannot evaluate it, nor draw conclusions from it.
Getting a trade wrong is nothing new to anybody who has ever traded. In fact, when I started to take positions I was told that I should expect to get 50 percent of trades wrong. What makes for a successful trader is discipline and exit strategy; making more on the winners than you lose on the losers. In that light it is reasonable, even generous, to assume that at least 25 percent of the positions declared at quarter’s end by hedge funds will be wrong, and we have no way of knowing which they will be.
So, as all of the analysis of the 13F’s appears over the next few days, keep all of this in mind. It is nice to be told, if we are long of Apple (AAPL), say, that some people that we regard as smart have the same position, or rather did over six weeks ago. If we don’t know why, or with what parameters, or even if they still do, though, we actually know nothing.