- I’ll describe in detail how you can follow hedge fund managers.
- It’s very important to understand the risk reward profile of the fund manager.
- Following allows us to find great investment ideas, but there are also big traps.
Every fund has to disclose its portfolio to the SEC quarterly in a 13F form which allows us to track hedge fund managers’ portfolios. It’s easy to track what George Soros, David Tepper, Seth Klarman, Dan Loeb, Carl Icahn, David Einhorn, Bill Ackman, Warren Buffett, and many, many other interesting investment stars have been doing. The data is usually disclosed 45 days after the end of the quarter, but nevertheless shows what these guys have been doing.
When you see the research power all those funds use, you might think it’s an excellent free lunch. Well, it could be, but there are a few things to be careful of.
In today’s article, I’ll first describe how you can follow what other hedge fund managers are doing, then I’ll elaborate on an example from George Soros and Bill Ackman, and I’ll conclude with what to be careful of and what to really take as a free lunch offered by the SEC through mandatory disclosure policies.
How You Should Follow
First, you have to know the name of the reporting fund and then go to the U.S. Securities and Exchange Commission website. For example, if I want to see what George Soros was doing in the last quarter, I’ll type in SOROS FUND MANAGEMENT LLC in the SEC’s search function and a list of related documents will pop up.
Figure 1: Soros Fund Management LLC SEC search results. Source: SEC.
I’ll click on the link that provides all the company filings, and will get to a page with all the documents that the SEC requires to be public.
Figure 2: All company filings. Source: SEC.
And there are the latest 13F forms. By clicking on the documents, we come to the page where all the tables are that show us the number of shares owned and the value of the fund’s positions.
Figure 3: Soros Fund Management holdings at the end of Q1 2017. Source: SEC.
By comparing the new with the previous 13F form, we can see what Soros has been buying or selling and his general portfolio. A quick look at the top positions shows that Soros has trimmed his $123 million position in Adecoagro S.A. (NYSE: AGRO), a South American agribusiness, down to $102 million. The position in the Russel 2000 ETF has been increased by 36% and is now at $459 million. The largest portfolio position, Liberty Broadband (NASDAQ: LBRDA), has also been increased as the fund increased the number of shares owned by 5.2%. The position is now worth $683 million.
Should You Follow Hedge Fund Managers?
Well, LBRDA has been an excellent stock to own in the last two years and those who followed Soros are certainly happy.
Figure 4: LBRDA’s performance in the last two years. Source: Nasdaq.
However, if you had instead followed Bill Ackman’s Pershing Square Fund and invested in Valeant Pharmaceuticals (NYSE: VRX) in October 2015 when VRX was the fund’s largest position ($3.4 billion), you wouldn’t be so happy as you would be with Soros’s LBRDA.
Figure 5: VRX fell from above $150 to the current $12.24. Source: Nasdaq.
Main Investment Take Away
Considering the two examples above, it’s clear that blindly following hedge fund managers just because of their fame, activism, or huge research power doesn’t always end well. However, analyzing what others are doing is always a good thing as it helps in confirming your own ideas.
For example, a quick overview of what hedge fund managers have been doing lately shows that they all sold Apple (NASDAQ: AAPL). Dan Loeb sold 1.85 million shares, Julian Robertson also exited his AAPL position, David Einhorn trimmed his AAPL position. So, the largest holding of all mutual funds and passive investment vehicles isn’t the favorite of hedge fund managers anymore. This confirms also my view that AAPl is much more risky now at $150 than it was at $100 as practically nothing fundamental has changed since then.
In order to follow a hedge fund manager, what has to be understood is the risk profile of the manager. They often tend to get extremely greedy or do very risky things when their returns don’t match expectations, like Bill Ackman did with VRX.
What I like to do is to follow what successful fund managers are doing in order to find new, interesting investment ideas and see if my portfolio allocation is the most appropriate. As I’m a value growth investor, I especially follow investors that are more like me. Thus, I suppose you will also follow the investors you fancy the most.
Back to whom I follow. As I like profit first and foremost, I focus on the most profitable investors. The following list shows the most profitable hedge fund managers in the last 50 years.
Figure 6: Top hedge funds ranked by net gains since inception. Source: Bloomberg.
The most important thing is to understand the risk reward profile of the hedge fund manager before following or learning from one.
The above list gives a clear indication of the funds that have performed extremely well historically and have a certain long-term edge. Hedge funds that have been doing well only in the last 8 years are very risky as we can’t know how they will perform when this bull market turns into a bear market.
By following Ray Dalio (Bridgewater Associates), you know that his portfolio is an all-weather one and will probably provide positive returns for years to come as it has for the last 40 years.
Keep reading Investiv Daily as we’ll soon dig deeper into what hedge funds are doing and how their portfolios are structured.
As a final note, if a manager thinks that the disclosure of a position would influence the market price of the security, they can ask the SEC for a confidential treatment. Therefore, we can’t always know 100% what they are doing.