Why Stephen Taub is Dead Wrong About Following Hedge Funds’ 13F Filings

Always test your theories using actual data. Stephen Taub’s assumption that it’s preferable to imitate hedge funds’ picks in real-time is grossly misguided.

If we can outperform hedge funds by imitating their positions with a 2-month delay, this proves that they are early in timing the market, and it is better for investors to imitate them two months after the fact.

Taub’s Third Argument: Hedge funds use exception rules and hide some of their positions for a certain period of time, sometimes even longer than 45 days. He assumes that this delay makes these stock picks worthless.

He’s wrong because: We used all filings (including those that disclose positions several months late) and found positive alpha.

The assertion that exception rules somehow prevent some of hedge funds’ stock picks from being discovered until it’s too late is incorrect. Our analysis shows that even with this longer delay, it’s still possible for 13F mimickers to generate a positive alpha.

With that being said, we’d be happy to compare our empirical results with those of Stephen Taub, but sadly, we were unable to find any actual data in his corner.

Taub’s Conclusion: Don’t treat 13F filings as a valuable tool that will enable you to invest like the smart money.

He’s wrong because: Stephen Taub doesn’t have any data to back up his claims. Our research showed that imitating hedge funds’ most popular stock picks generated a monthly alpha of 19 basis points. But that’s not the whole story.

Investors that imitate hedge funds’ most popular small-cap stock picks increase their chances of beating the market significantly. On the whole, hedge funds generate significantly higher alpha in the small-cap space. There are fewer analysts covering the little guys, and these stocks are less efficiently priced. Therefore, hedge funds spend enormous resources to analyze and uncover data about these stocks, and it’s one of the best places to generate stellar outperformance.

We recently started sharing our best strategies in our quarterly newsletter. Since going online, our small-cap strategy has beaten the SPY by 12.2 percentage points over the past four months.

While our track record is shorter than most, our bevy of backtests prove that this strategy works; between 1999 and 2009, the 15 most popular small-cap stocks among hedge funds managed to beat the market by 1.4 percentage points per month.

Our small-cap strategy’s alpha was 1.2 percentage points per month over this time period.

How can you capitalize on this strategy?

Check out our latest quarterly newsletter in our Premium section, and try it free for 30 days.