Monday, May 5, 2014

Trying to Make Money by Following Money Managers

Trying to Make Money by Following Money Managers

During my tenure at the North Carolina pension plan, a money manager tried to pitch me on the idea of building stock portfolios based purely on the quarterly holdings reports  (13-F filings) submitted by successful money managers to the SEC.  The money manager didn’t do any fundamental research on companies.  Rather he collected mutual fund performance data to find exemplary portfolio managers, and then gathered their 13-F filings.  In other words, the portfolio was an amalgamation of the holdings of other managers.  The manager contended that those stocks would outperform an index, even though the SEC data captured holdings that were three to four months old.

The odds on this kind of strategy actually adding value are extremely low.  First, managers with superior are track records are likely to regress back toward the mean.  Their run of luck is likely dissipating by the time it’s seen as worthwhile to track their regulatory filings.  Second, by the time these “superior” managers have purchased their positions, any potential value is almost certainly reflected in the stock price.  In my view the money manager pitching this approach was trying package a bunch of data as meaningful information.  We didn’t invest.

I was reminded of this old story, when I read that Greenlight Capital, managed by Steve Einhorn, had asked the SEC to delay disclosure of its quarterly 13-F position because it was still acquiring shares of Micron Technology.  Some investors believe that Mr. Einhorn is a gifted investor and attempt to ape his stock picks.  As a result, any morsel of information about his trading activity usually results in a flurry of copycat trades.   Never mind that Mr. Einhorn creates most of this frenzy by appearing on television and touting his stock picks at conferences and charitable events.  Matthew Goldstein captures Mr. Einhorn’s tactics in today’s New York Times.[1]

Because the SEC doesn’t act quickly, seeking a delay in disclosure creates one even if the request is later denied.  So Mr. Einhorn got seven his days to accumulate Micron without making the disclosure.  According to The Times he revealed the position at a charitable event on the eighth day.  Believe it or not, you can get rich people to make sizable donations to a charity by allowing them to listen to a hedge fund manager regale them with his “best” investment idea.  The managers has, of course, already taken his positions, so these talks only help nudge up the stock’s price.

Returning to the SEC filing, the agency already allows institutional investors 45-days after quarter end to make their 13-F submission.  Mr. Einhorn is a savvy investor. He knows the rules.  If he can’t accumulate his position during a calendar quarter plus 45 days, either he’s managing too much money buying securities that are too illiquid for his investment style.   It’s rather cheeky when one of the most sophisticated investors who routinely uses publicity to tout his ideas, turns around and seeks the SEC’s protection.

If you are going to be an active investor, you’d better prepared to do your own work.  Hearing hedge managers expound at investment conferences or charitable events is at best entertaining.  Rummaging through their SEC filings only tells you what money managers did in the past, not what you should do in the future.


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