Government Reports from Big-Money Investors: Three Things You Need to Know (but don’t)
Four times a year big-time money managers are required to file form 13F with the SEC. This always sparks news stories naming the most important investors, people like George Soros and Warren Buffett, and drawing conclusions about what they are doing. The implication is that you might benefit from looking over their shoulders.
You won’t! The information is worse than worthless — it is misleading. Here is why, the three things you should know:
- The reports are old news. The law provides 45 days to file after the end of the quarter and there is no incentive to be early. The process for filing has been streamlined for the modern age, but the requirements have not. This delay is an eternity in the modern investing world. The consumer of the information has no idea whether the positions are still valid. Has recent news been important? Could the firm reporting be selling into the strength generated by the report? They have no obligation beyond the legal reporting. They are free (and should be) to trade in the best interest of their investors as they get new information and opportunities.
- The reports cover only long positions. There is no requirement to report “shorts.” The implications of this gap invalidate the reports. Bill Ackman, for example, is widely known for his short position in Herbalife (HLF) and his very public attacks on the company and its business model.
If you relied upon the government to inform you about Mr. Ackman’s short positions, the 13F would tell you absolutely nothing!
Here is another example. George Soros reported long positions in Barrick Gold and a call (a bullish position) in a gold ETF. What do we know from this? Nothing at all. He might actually have a neutral gold position like a pairs trade, long Barrick and short another gold stock that he believes to be weaker. We don’t know, because shorts are not reported.
His long call position in the gold ETF might be paired with a short call. Whether the overall position is long or short depends on which strike and expiration date was bought and sold. Once again, we know nothing about the overall position. I do not know from the filing whether Mr. Soros is really bullish on gold, and neither do you.
3. The report on options positions is — can’t think of a kind word — clueless. Since the government will not approve a method of analyzing an options position, they require something that is really stupid. The filer reports long options only. This means that there are no spreads, including both long and short options, even though that is the most common method of trading for big-time investors. Worse yet, the long options are not described in terms of their actual value. The value of each option is assigned the nominal value of the underlying stock!! Professional traders, and the Nobel-Prize winning options modelers, know that an option has a value based upon a variety of factors, including the stock price, the strike price, the time to expiration, interest rates, expected volatility, and expected dividends. The option has a theoretical value based upon these factors and a “delta” (the expected change in option value for each dollar move in the underlying).
I understand the government problem in assigning a “theoretical value” and assuming some level of expected volatility. That does not excuse these blunders:
- Ignoring short positions in the spread
- Assigning the underlying stock value to options, even those that are far out-of-the money
Here is a great example from Mike Saltzman, my top researcher, associate portfolio manager, and a veteran options trader.
The reported SPY put position (a bearish bet) is 2.1 million. The government filings multiply that times the value of the underlying spy, reaching a total value of $430 million or so. Since the total number of puts is greater than last quarter, this is seized upon in the popular media.
In reality, we have no idea of the strike or the time to expiration for these puts. The implication is that we have no idea of the value or the deltas for each put. If far out of the money, they might be cheap protection. More likely they represent a spread, the sort that a professional trader might buy as cheap downside protection.
Suppose, for example, that you did this spread.
Buy 1.05 million Jun’16 180P for .21
Sell 2.1 million Jun’16 175P for .12
Buy 1.05 million Jun’16 170P for .09
This is a put butterfly, an extremely common limited risk position. We own the same number of long and short option positions, so risk is limited. This particular butterfly would cost about $.06 in option, and $6 in commissions. It has a lot of potential. If the SPY goes down to 175 it would make $9.94 per spread or almost This spread has a very small short delta component. It will only make money if the SPY were to fall more than 10% in just a few weeks. It costs eighteen cents (or about 180K) and might make almost $10 million.
This is not really a short bet on the market. It is downside protection purchased on a risk/reward basis.
Meanwhile, on the 13F this would show up as being long 2.1 million puts, with a value of (think short value) of $430 million — completely unrelated to the actual position value or properties. There are many other examples of spreads that would fit the 13F filing, including some that actually are bullish plays on SPY.
From the filing itself we cannot even conclude that Mr. Soros has a short position in SPY. It is extremely unlikely that he simply bought 2 million puts without any offsetting short puts. Professional traders usually work with spreads.
The 13F report is an unhelpful and costly exercise. Those who take it seriously may well do the wrong thing.
I wrote about this two years ago but the media coverage has not improved. The best investment advice is to ignore these stories.