Forty-five days after the end of each calendar quarter, the holdings of entities subject to Section 13(f) of the Securities Exchange Act of 1934 have their holdings reported to the public, which they had submitted on Form 13F. (Sources differ on using 13f or 13F, for the rule and the form; when quoted, they are provided as found, and 13F is otherwise used generically.)
In response to the reports, there are stories in the financial press about who did what during the previous quarter. At the same time, a number of market players spring into action, including database and data analytics firms that track and parse the information, replicators who try to match the profiles of leading investors, quant firms who ingest the information into their models for individual stocks, and competitors of the reporting firms, who look for ideas to investigate.
Therefore, it is a good example of how a single rule can spawn all sorts of structures and activities throughout the ecosystem. Future changes in the rule are likely — some prompted by the lack of disclosure of the large positions at Archegos in advance of its blowup — creating ripple effects. (As a “Four for Friday” posting, this is not an in-depth look at the implications, but a survey of a few ideas and readings for your consideration.)
A good place to start
David Kwon, a PhD candidate at Yale, has posted an update of his dissertation on SSRN, “The Differential Effects of the 13f Disclosure Rule on Institutional Investors.” It is long and thorough. The first half delves deeply into the rule and the various entities and portfolio holdings to which it does and doesn’t apply.
Because “the degree of portfolio transparency varies both across and within institution categories” (only about 15% of institutional assets are reported), “the 13f rule creates a discriminatory environment where institutions of similar size, similar type, and facing the same economic exposure can face differential disclosure treatment.”
The abstract leads with the main research question, analyzed in the second half:
The 13f rule, which requires institutions to disclose mainly stock investments, has recently generated significant debate about disclosure costs. Some have expressed concern that copycatting (and frontrunning) activities from outside investors can harm disclosing investors’ returns, while others argue that copycatting is non-existent due to the 13f reporting delay, and that even if copycatting did exist, it would benefit disclosing investors’ returns. Do copycats harm disclosing investors?
Kwon’s conclusion is that
the likely source of the confusion as to whether disclosure is costly is the fact that copycatting activities can either be beneficial or harmful to copied investors’ returns over time, depending on the ownership horizon of the copied investor.
Coupled with the differential reporting requirements,
the 13f rule is likely disincentivizing long-term investments in public stocks in favor of short-term investments in stocks as well as investments in instruments that are not disclosed on 13fs.
The dissertation is full of interesting exhibits, and serves as a useful introduction to the topic, a general reference work on it, and research specific to the question of copycatting.
Other research
There have been many analyses of the investment strategies related to disclosures (and non-disclosures) in response to the 13F rule.
The authors of the paper “Systematic 13F Hedge Fund Alpha” studied a Novus database that identified hedge funds that had demonstrated “a longer-term view on equity.” Therefore, the funds analyzed represented a subset of a subset of organizations that are subject to the rule.
Their approach focuses on assessments of conviction and consensus, and shows “economically meaningful and statistically significant risk-adjusted returns.” However, the conclusion offered illustrates that there’s a marketing angle involved, something common in practitioner-based research:
Thus, we show that in constructing a 13F strategy, one must think about the ‘who’ just as much as the ‘how’ to be able to systematically extract statistically significant hedge fund alpha in a point-in-time way. This, however, relies strongly on being able to identify the ‘who’ accurately, which is difficult to do without a reliable data provider.
The paper references the approach of “Best Ideas,” research from Miguel Anton, et. al, first published in 2009 and updated thereafter, most recently last year. They argued that the “conviction” holdings of institutional investors do the heavy lifting in performance terms, and concluded that “the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolio that are not outperformers.”
One interesting angle regarding the 13F rule is the ability for filers to request “confidential treatment,” delaying disclosure. An article by Vikas Agarwal, et. al, in the Journal of Finance (and the earlier working paper) showed that “the evidence supports private information and the associated price impact as the dominant motives for confidentiality.”
Tiger Cubs
Over time, the so-called Tiger Cubs have been the subject of many press accounts based upon their quarterly 13F filings (even though as they have gotten more deeply involved in private investing, the reported holdings account for a smaller percentage of assets under management).
Up until six months ago, the coverage was glowing — for example, in a 2019 piece from WhaleWisdom Alpha. The aforementioned Novus includes an aggregation of the Cubs on its data platform (in addition to tracking them individually); this posting from it looks at how the Cubs did during the first part of the pandemic. The story includes a link to the platform which shows attributes of the group through the end of 2021.
Things have changed completely in 2022. Now the quarterly filings are fodder of a different kind, as a May story from Bloomberg indicates: “Tiger Cubs Ditched Tech Losers, Buying Others That Did Worse.” Two days ago, the 13F holdings in Carvana were used to show one of Tiger Global’s biggest failures of late:
Beware “performance” claims
Because of all of the things that are left out, don’t mistake the information gleaned from 13F filings as performance, says David Spaulding in an issue of his firm’s “Performance Perspectives.” Reporting holdings is not reporting performance — and many of the stories you read may offer numbers and conclusions that are off base.
Published: June 17, 2022
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