SAN FRANCISCO (MarketWatch) — Knowing what stocks are held by top hedge fund managers is a useful source of investment ideas and an important risk factor for individual investors to consider.
But the data is dated, limited and can be misleading, so investors shouldn’t rely on it too much.
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“There is indeed weak — but profitable — information in the holdings data,” said Ted Aronson, founder of investment firm Aronson+Johnson+Ortiz. “As with most stock market information, it is noisy and sloppy, but there is insight to be gleaned.”
Yet even with $20 billion in assets and 38 employees, AJO struggles to gather profitable information from hedge fund holdings, so there’s “not much left for the ‘great unwashed,’” Aronson noted.
Despite the limited benefit of such efforts, some of the biggest firms on Wall Street, including Goldman Sachs Group Inc. (GS158.26, +0.29, +0.19%) , Bank of America Merrill Lynch (BAC13.34, +0.01, +0.08%) and Credit Suisse Group AG (CS42.30, -0.86, -1.99%) expend substantial energy tracking hedge fund holdings.
That’s because the hedge fund industry is an influential part of the market. Assets under management are almost $2 trillion, up from $539 billion in 2001, according to Hedge Fund Research Inc.
That amount of money can move markets, so big brokerage firms keep tabs on the top players and what they may be thinking.
Hedge funds often trade a lot too, so they’re an important source of brokerage commissions. That gives them access to some of the best investment ideas Wall Street generates.
For other investors, tracking hedge fund holdings may be a good way to start investigating such valuable ideas.
“It’s not a bad starting point,” said Vladimir Belinsky of Hermitage Advisors Ltd., which advises wealthy people on investments including hedge funds. “If you have 10 top hedge funds owning the same position, it’s got to tell you something. You’re benefitting from all the work and research these firms have done.”
Goldman’s VIP list
Goldman started tracking hedge fund holdings in 2006, at the height of the hedge fund boom. Analysts at the firm currently track almost 700 hedge funds with gross equity assets of $1.2 trillion.
They compile a Hedge Fund Very Important Position, or VIP, list each quarter — a basket of the 50 U.S. stocks appearing most frequently among the top 10 holdings of long/short equity hedge funds.
Goldman's hedge-fund VIP list
Of all the hedge funds tracked by Goldman, its Very Important Positions, or VIPs, are a basket of the
50 U.S. stocks appearing most frequently among the top 10 holdings of long/short equity funds.
NO. OF FUNDS WITH STOCK AS TOP 10 HOLDING
J.P. Morgan Chase
Bank Of America
Johnson & Johnson
Liberty Media Capital Group
Liberty Media Starz Group
Las Vegas Sands
Source: Goldman Sachs. Data as of Dec. 31, 2010.
The top five stocks at the end of 2010 were Apple Inc.(AAPL352.18, +0.64, +0.18%) , Citigroup Inc. (C4.45, -0.01, -0.22%) , Microsoft Corp. (MSFT25.62, -0.19, -0.74%) , J.P. Morgan Chase & Co.(JPM45.86, +0.13, +0.28%) and Google Inc. (GOOG579.87, +0.13, +0.02%)
This group of 50 stocks, reconstituted quarterly, has outperformed the Standard & Poor’s 500-stock index(SPX1,314, +4.14, +0.32%) by 0.75% in every quarter since 2001, with less volatility, Goldman said in a Feb. 18 research note.
Goldman’s clients — institutions, wealthy investors and corporations — get this research. The firm doesn’t have a retail brokerage business.
However, individual investors can track hedge fund holdings through Securities and Exchange Commission filings known as 13-Fs.
Major investment firms have to disclose their U.S. equity holdings on this form 45 days after the end of each quarter. So positions at the end of 2010 were made public in mid-February.
The lists of U.S. stock holdings should be compared to the same disclosures from previous quarters to see how hedge funds have changed positions.
There are also several online services dedicated to tracking hedge fund holdings.
BarclayHedge, which has been tracking hedge fund performance since the 1980s, is set to unveil a new service that lets subscribers monitor managers’ positions.
“It gives you a chance to look under the hood,” BarclayHedge President Sol Waksman said.
However, even Waksman stressed that such data isn’t “the be all and end all” for investors.
One drawback of this information is that it excludes short positions, or negative bets, that hedge fund managers use to protect, or hedge, their portfolios against losses.
Investment firms also don’t have to disclose derivative positions, like options, swaps and futures, in 13-Fs.
A hedge fund may disclose a big holding in a particular stock, but that position may be hedged by a large short position, or a derivative that limits exposure.
“You have to be careful not to read too much into it because you may not be seeing the whole trade,” said Charles Gradante of Hennessee Group, a hedge fund industry consulting firm.
Hedge funds are sometimes “boxed,” which means they hold a long position that’s offset completely by a short trade of equal size, Gradante explained. Managers use this technique to protect against losses when the market is under a lot of stress — for instance, when equities slumped in the wake of the March 11 earthquake in Japan.
“Once the risk is past, a manager can cover the short by buying back the shares, then ride the stock back up with their long position,” Gradante said. This trading strategy isn’t captured in 13-Fs, he noted.
Indeed, hedge funds are thought to outperform mutual funds mainly because they can short stocks. If investors just look at long positions of hedge funds they may be missing the most-valuable part of managers’ efforts, Gradante added.
Investment firms also don’t have to disclose overseas stock holdings.
The information is also 45 days old by the time its disclosed. For hedge funds that trade frequently, combing their 13-F is of limited use.
Another problem is that stocks heavily held by hedge funds can fall more at times of extreme market stress.