It’s often thought that 13F filings aren’t of use to investors, since they are released six to seven weeks after the end of a quarter. However, we think that there are a couple of different uses for this information. First, by pooling 13Fs it is possible to develop investment strategies that beat the market; for example, we have found that the most popular small cap stocks among hedge funds produce an average excess return of 18 percentage points per year- even with this lag (learn more about hedge fund small cap strategies). Another technique is to treat filings as investment advice- don’t blindly follow what top managers are buying, but review their stock picks and do more research on those an investor is less familiar with.
Billionaire John Paulson has struggled since making history with his short of U.S. subprime mortgage assets during the housing bubble. Over the past couple years his fund has lost money, but he remains widely followed in the financial media. We went through Paulson’s 13F for December 2012, comparing it to previous filings (see Paulson’s stock picks over time), and here are some changes that we noticed (Paulson remains heavily invested in gold and gold related companies):
Energy merger arb. Paulson was actually known as a merger arbitrage investor before his “big short” and two of his top holdings at the beginning of 2013 were energy companies which are in the process of being acquired. Merger arbitrage is a favored strategy of some hedge funds because returns depend on whether or not the deal closes, and so tend to be more or less independent of market conditions (read more about merger arbitrage strategies). Chinese oil company CNOOC has received approval from both the U.S. and Canadian governments to buy Nexen Inc. (NYSE:NXY), which is most notable for its position in the Alberta tar sands; Paulson reported a position of 25 million shares in that stock. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is set to buy Plains Exploration & Production Company (NYSE:PXP), which itself recently acquired a number of Gulf of Mexico assets from BP. Paulson owns about 13 million shares of Plains.
Sprint. The fund initiated a position of over 120 million shares in Sprint Nextel Corporation (NYSE:S), which is in its own special situation at this time as it issues considerable equity in order to fund acquisitions. While it is unprofitable on a trailing basis, and expected to report losses of 85 cents per share this year, the stock price has risen considerably over the last year as investors trumpet Sprint’s pricing relative to its competitors and believe that its current activities will unlock shareholder value. We’d also note that Paulson added shares of MetroPCS Communications Inc (NYSE:PCS) to his portfolio during the fourth quarter; MetroPCS is another merger target as well.
See one stock Paulson was selling last quarter: