What Value-Focused Hedge Funds Are Doing Now

by: Cambridge Fund Research

The Goldman Sach’s “Hedge Fund VIP List” gets a lot of attention for aggregating the 13F filing information of approximately 600 hedge funds and reporting the top held stocks. While there is some value in this type of analysis, it’s really only good for giving a snapshot of the industry. By focusing on more narrowly defined groups of funds of interest, it is possible to generate much more useful insights into the underlying themes being expressed over several quarters of data (as opposed to just the most recent two).

It is important to select a well-defined peer group of filers before attempting to aggregate and interpret any 13F information. For example, looking at the combined 13F information for value oriented long/short equity managers over time is going to yield much more useful information than looking at the 13F holdings of a group hedge funds focusing on strategies that aren’t conducive to 13F analysis (e.g. market neutral equity, stat arb, multi-strat, etc.).

JAT is an excellent example of a long/short equity fund that tends to have long-running themes and which has done very well this year but generally runs a very low net exposure. While it’s still very instructive to look at their reported long positions over time, it must be done with the understanding that there is also a very large short book that is not reported on the 13F filing. Similarly, Paulson & Co. has drawn a lot of interest in their 13Fs, but because the investment manager is required to only report positions at the level of the management company (as opposed to the individual hedge funds), it requires more careful analysis of certain managers. Just because Paulson & Co. reported over $3 Billion worth of the GLD ETF on their most recent filing does NOT necessarily mean his Paulson Advantage fund is making a huge bet on gold because he’s also running a gold-only hedge fund as well as gold-denominated shares of his other hedge funds.

The good news, however, is that because the vast majority of long/short equity managers do NOT run such consistently low-gross exposures (and have sufficiently simple management structures) then analysis of their 13F filings is a very useful way to generate real insights into how their portfolios are being positioned over time.

For the following analysis, we have chosen to look at 12, long-biased, value-oriented, managers with an equity focus (or enough to justify looking at 13f info). This list includes well-known names such as Seth Klarman’s Baupost Group and David Einhorn’s Greenlight Capital as well as some lesser-known (but equally interesting) managers like Act II Management, Scout Capital and Seminole Management. In the case of Baupost, for example, although they’re not an equity-focused manager (their equity book is less than 20% of their total fund holdings) because it’s run as if it were a sub-fund within a multi-strat, it’s still instructive to refer to their 13F information.

We look at which stocks these managers are investing in as a group as well as how big their average position is in each stock (the group’s “conviction” score):

(Click to enlarge)

Only the top 20 collectively held positions over the last 4 quarters are shown here.

As you can see, at the end of 2010, 4 of these 12 managers had a position in Microsoft that averaged 3% of their total reported positions. As of this most recent filing the number of managers holding (NASDAQ:MSFT) increased to 8 and the average size of each position increased to 5%. Similarly, (NASDAQ:AAPL) has increased from 4 to 6 managers with an average position of 9% (up from 5%). Qualcomm, increased from just one manager holding a 1% position in Q4’10 to four of our managers holding an average 4% position now. Clearly, our peer group is lately finding value in the tech sector whereas some of the other names (NYSE:ABX), (GLD) haven’t been dropped by a lot of managers but have been reduced. Visa is the notable new position with 3 of our managers initiating relatively large positions in just the 2 most-recent quarters.

The goal of this report is to use collective 13f information from a group of specifically chosen managers in order to extract actionable insights over time. The rows highlighted in green are those positions that have been scored as “high conviction increases” using our proprietary algorithm. By identifying those stocks that are being broadly increased among a group of successful managers, individual investors can benefit from this collective wisdom.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.