Hedge Fund Education Center

Are the Delays in Hedge Fund Reporting Too Long for Piggyback Investing?

Hedge funds generally report their end-of-quarter holdings with a 45 day delay. Some of the positions in their portfolios could be initiated at the beginning of the previous quarter so the delay in reporting could be as long as 4.5 months. It is also possible for hedge funds to buy and sell stocks within the quarter and in such cases they don’t even have to report these transactions- but there are a few exceptions. Skeptics argue that these delays in reporting are too long for piggyback investing and outsiders cannot profit generate alpha by imitating hedge funds.

Are the delays in hedge fund reporting too long for piggyback investing? This is a question we have to answer on a case by case basis. One of the ways for ordinary investors to imitate hedge funds is to invest in the most popular stocks among hedge funds. We have nearly 1200 dead and alive hedge funds in our universe and we’re able to obtain 13F holdings for 91% of these hedge funds. This is a preliminary analysis but we’ll update our results as we finish manually downloading and processing the 13F holdings of the remaining hedge funds. Survivorship bias is a serious problem in piggyback investing. There are several websites/newsletters focused on the stock holdings of “successful” hedge funds because they were successful in the past. Their success may be a result of pure chance as some hedge funds fail and others prevail. By including all hedge funds and using point-in-time data we sidestep the survivorship bias problem.

Our data covers the 10 years between 1999 and 2008. We picked the 30 most popular stocks in each quarter by counting the number of hedge funds with long stock positions in each stock. Then we calculated the monthly returns of these 30 stocks for the following three months. We calculated average returns and alpha (using Carhart’s four factor model) with no delays (these results reflect hedge funds’ experience) and with a 2-month delay (this reflects imitators experience). When there were no delays, the average monthly return of the most popular stocks was 3 basis points higher than the S&P 500 Total Return Index. The four factor alpha of this 30-stock portfolio was 10 basis points per month. This is what hedge fund investors experienced BEFORE paying hedge funds management and performance fees. Of course this analysis covers only the long stock picks of hedge funds that are popular among other hedge fund managers. Here are the regression results:

30 Most Popular Stocks: 10-years of Data (Hedge Fund Experience)

Variable DF Parameter Estimate Standard Error t Value Pr > |t|
Intercept 1 0.09641 0.13581 0.71 0.4792
Mkt_RF 1 0.89776 0.03143 28.57 <.0001
SMB 1 -0.18461 0.03777 -4.89 <.0001
HML 1 -0.10903 0.03845 -2.84 0.0054
MOM 1 -0.07325 0.02405 -3.05 0.0029

As you can see hedge funds’ most popular stocks have a beta of 0.9 and they are larger cap stocks with a small tilt of momentum.

When we imitate hedge funds’ most popular stock holdings with a two month delay, we observe better results. The average monthly return of the most popular stocks was 11 basis points higher than the S&P 500 Total Return Index. So, the two month delay actually improved the returns of piggyback investors. The four factor alpha of this 30 stock portfolio was 19 basis points per month. Again, hedge fund imitators experienced better returns than hedge fund investors on the long side of the portfolio. Here are the regression results:

30 Most Popular Stocks: 10-years of Data (2 Month Delay in Implementation)

Variable DF Parameter Estimate Standard Error t Value Pr > |t|
Intercept 1 0.18932 0.14359 1.32 0.1900
Mkt_RF 1 0.90903 0.03346 27.17 <.0001
SMB 1 -0.23503 0.03954 -5.94 <.0001
HML 1 -0.10327 0.04057 -2.55 0.0122
MOM 1 -0.07845 0.02312 -3.39 0.0009

These results show that imitating hedge funds’ top stock picks with a two month delay isn’t a handicap for investors- in fact it is a blessing in disguise. However, this may not be the case in all strategies. Imitating some hedge funds with a long delay may prove costly for investors. However, our goal isn’t to beat the hedge funds’ gross returns, it is to generate positive alpha when we imitate some of hedge funds’ stock picks.

Insider Monkey publishes the list of the 30 most popular stocks among hedge funds on the 20th of February, May, August, and November. Subscribe to our quarterly newsletter to access this list and other strategies that historically beat the market by more than 15 percentage points per year (Read about them here).

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