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The art of reading 13-F filings

Much is made these days when the brand name hedge funds release their holdings via 13-F filings with the SEC.  However the analysis of these holdings is often less than thorough.  Jay at Market Folly notes how Bloomberg got it wrong in their analysis of Eton Park Capital Management’s latest filing.

By omitting various options positions they mistakenly made the claim that their largest holding is the SPDR Gold Trust (GLD).  Not only is not their largest position, but the options positions they hold (both puts and calls) show that their viewpoint towards gold is much more nuanced.  Jay writes:

We don’t know their true exposure to gold because a 13F filing does not disclose the strike price or expiration date of underlying options positions. Not to mention, Eton Park is an arbitrage focused fund. As such, all of these discrepancies are relevant to determine the type of wager they are making with various positions. The fact that Bloomberg completely omitted the information that Eton Park owns both calls and puts on the same exchange traded fund is somewhat appalling. It’s one thing to own just the shares of GLD as they’ve construed. It’s entirely different when you add in ownership of both puts and calls on the same shares.

A similar situation took place in regards to T2 Partners (Whitney Tilson) holdings in Interoil (IOC).  However the misreading of the filing changed what is a bearish position into a bullish one.  Tilson writes in a recent missive:

It says a lot about who owns InterOil when folks on the company’s message boards are saying we’ve gone long the stock based on our 13-F.  HA!  This is a very large bearish bet for us.

A lot of people make this mistake when reading 13-Fs: managers often own puts (which are also disclosed in the 13-F) or are short a stock (which isn’t disclosed) and then own a small offsetting long position to make it easy to trade around it.

In our case, our 13-F (http://sec.gov/Archives/edgar/data/1327388/000139834410001071/fp0001970_13fhr.txt) shows that as of 6/30, we owned 1,623 put contracts (representing 162,300 shares of stock) on IOC and, in addition, were long a mere 10,400 shares.  Puts can be very hard to trade, so we just bought more puts than we wanted and offset the extra amount by buying some stock, resulting in the desired net exposure.  Then, if we want to increase or decrease our bearish bet, we can simply buy or sell the stock.

Even if one is careful in reading current fillings, under today’s filing standards there are always going to be gaps in your knowledge about a manager’s holdings.  However there is a ray of hope out there for inveterate filing junkies.  In the Dodd-Frank bill there is apparently the potential for new short sale disclosures that would help round out a view of any particular manager’s portfolio positioning.  However even then our knowledge about a manager’s positioning will not be perfect.  In short, investors would be well advised to do their own homework.

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