Of late a cottage industry has grown up around the analysis of 13-F forms of institutional investors, more specifically hedge funds. The idea being that piggybacking on the positions of noted hedge funds can provide investors with information to generate alpha. The problem, aside from the stream of auto-generated posts often entitled “The five hedge funds that lost/made big money in XYZ,” is that 13-F reports are at best an incomplete picture of how a hedge fund is positioned.

One of the big ways in which a hedge fund can choose to delay disclosure is through seeking confidential treatment of certain holdings. For example, Warren Buffett is well-known for his seeking this treatment. By seeking this treatment hedge funds can delay the disclosure of certain holdings, even if their application is eventually denied.

This provision provides for a natural experiment to see if the holdings hedge funds choose not to disclose differ from their other holdings. The answer is yes. A new paper forthcoming in the Journal of Finance explore this very issue. The abstract from the paper:

Uncovering Hedge Fund Skill from the Portfolio Holdings They Hide

Vikas Agarwal
Wei Jiang
Yuehua Tang
and Baozhong Yang

This paper studies the “confidential holdings” of institutional investors, especially hedge funds, where the quarter-end equity holdings are disclosed with a delay through amendments to the Form 13F and are usually excluded from the standard databases. Funds managing large risky portfolios with non-conventional strategies seek confidentiality more frequently. Stocks in these holdings are disproportionately associated with information-sensitive events or share characteristics indicating greater information asymmetry. Confidential holdings exhibit superior performance up to twelve months, and tend to take longer to build. Together the evidence supports private information and the associated price impact as the dominant motives for confidentiality.

The bottom line is that you have to be a careful consumer of information surrounding hedge fund disclosures. There are number of ways in which hedge fund positions are not captured in 13Fs. You are often not seeing a hedge fund’s entire picture, nor their best ideas. So-called confidential holdings are just one of the ways hedge funds try and keep hard-earned information private for just a little while longer.