I recently joined the hosts of CNBC Street Signs to debate the merits of disclosure based investing. It occurred to me as I prepared that a lot of the criticisms of this strategy tend to be repetitive, mostly because it is still widely misunderstood.
Yes,
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disclosures are delayed
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a manager can conceivably have sold out of his positions by the time the disclosure is public
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disclosures exclude a manager's short positions
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a manager can request confidentiality for certain positions
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disclosures only include US exchange-traded securities including ETFs and ADRs
You'll hear the above cirticisms from time to time usually followed by "I've spent a zillion years on wall street". If you've spent any time around AlphaClone and our research you'll know our response to the above questions well. For the uninitiated:
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The effect of the delay is very small and sometimes non-existent but don't take our word for it – you can access our backtest results on our research site.
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Why is the effect small? Average holding periods are much longer than most people perceive them to be.
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A manager's outperformance is largely due to their long positions not their short positions. Otherwise performance for the manager's long only clone would not come close to approximating the manager's actual performance – see our article here.
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Positions for which managers request confidentiality must be approved by the SEC and represent a fraction of all disclosed securities. In any case, our simulations ignore amended filings post the clone's rebalance date so as to avoid “backfill” bias.
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You got us on that final bullet. Disclosures include US exchange-traded equities only. That means if a manager is expressing his/her investment thesis through private securities or off shore publicly traded securities those will not show up. Still, increasingly, and to a much higher degree, hedge fund managers also gain exposure to foreign markets through ADRs and ETFs, which are disclosed. As of last quarter, AlphaClone tracked $5.2 trillion dollars of disclosed equities across roughly 330 managers (which includes both hedge funds and institutional investors). Of that amount, $600 billion was disclosed by 225 hedge fund managers representing 50% of total assets under management, public or private, worldwide across all hedge funds. That's a lot any way you choose to do the math.
Like any source of information, 13Fs are not perfect but the insights they can lend are real and used intelligently they can deliver alpha.
