This article over at Barron’s makes several good points about the difficulties in cloning a given hedge fund’s holdings based strictly on 13F filings. Problems include the 45-day delay in reporting the holdings and reported holdings being restricted to certain securities only. Many international investments, short sells, and derivatives utilized by hedge funds are not included in 13F holdings for example.
Funds that have a high turnover are not well suited to cloning.
Due to these limitations in 13F filings, funds with a high rate of turnover are a poor choice for cloning. This was confirmed when backtesting results in my “Active vs Stable Funds” article. In it, the highest conviction picks from the 10 funds with the least amount of turnover easily outperformed the picks from the funds with the highest percentage of turnover. Since 13F holdings are 45 days out from the actual reported date, you don’t get to take advantage of the hedge fund manager’s skill at timing investments. In fact the fund may not even own the the stock by the time the 13F is filed. By looking at funds with low turnover you minimize the reliance on timing and instead utilize the manager’s long term stock picking ability.
Which Funds Work Best?
Look for value managers and those that have the highest retention rate in their top holdings. Warren Buffett’s Berkshire is the obvious choice. Others that come to mind include George Soros and Bill Ackman’s Pershing Square Capital.
Let’s run a query to find other examples. We’ll limit our pool of filers to those that have at least two email alert registrations with Whalewisdom and further exclude funds with more than 1,000 individual holdings to avoid the large institutional investors. We’ll only look at the top 10 holdings in Q1 2011 and find funds that had the highest retention rate in those holdings in Q4 2011.