Stephen Taub at Institutional Investor published an article this morning warning readers about the temptations of following hedge fund 13F filings. He basically makes three points - 1) positions widely held by hedge funds can lose money, 2) a manager's portfolio can change materially from his/her most recent filing, and 3) hedge funds can "hide" the fact they are accumulating a position by excluding the security from their filing.
I have spoken with Stephen on a couple of occasions and have a lot of respect for him and his work so I'm going to let readers of his article judge it on its own merits. I've also written extensively about the criticisms that he highlights in his article. You can review our most recent article on the subject here. Finally and perhaps speaking the loudest to counter Steve's conclusions - I'd simply point to our actual performance across both managed accounts and exchange traded products.
To enlighten the discussion further, this is a good opportunity to update a key data point that is relevant to the discussion around 13F efficacy. We have often cited our own research that 2/3 of our single manager Top 10 Holdings clones have outperformed a passive broad market index over an extended period of time (since 2000). To be clear, the clone for each manager is long only and holds the manager's largest ten positions, rebalanced quarterly five days after the 45 day 13F filing window closes, equal weighted. To put this in context, Standard and Poor's in their periodic SPIVA Scorecard look at the proportion of active mutual funds that have outperformed their passive benchmark over a 3 and 5 year period by ANY amount. As of June 30, 2012 the SPIVA report shows:
- Only 10% of active mutual funds outperformed their benchmarks over a 1 year period.
- Only 26% outperformed over 3 years
- Only 23%, outperformed over 5 years
So we're saying that our clone portfolios are more likely to outperform the market than active mutual funds by a factor of 2 or 3 to 1. Is that still the case after incorporating 2011/2012 performance? See table below.
As you can see from the table above the metric still holds - 2/3 of clone portfolios outperform the market since 2000, 1/3 outperform by 4 percentage points annualized since 2000 (that's huge by any measure). If you're wondering who the 12 funds were that outperformed by 10 percentage points since 2000, that information is updated daily for our members on AlphaClone's Leaderboard. The list includes folks you've probably heard of like Appaloossa Management and SPO Advisory and many you likely haven't such as Marathon Asset Management and Advisory Research Inc. If there is an appropriate warning however, it is that when selecting managers to follow, you should beware to chase performance simply based on a manager's single clone over one start point and one end point.