New York (HedgeCo.net) – Through our affiliate company HedgeCoVest, we have been cautioning investors about the dangers of trying to mimic hedge funds by following the 13F filings of top hedge funds. Finally, a major publication is making the same case. The Wall Street Journal featured an article over the weekend entitled The Problems With a Copycat Stock Picker.

While the Journal article focused on only one negative aspect of mimicking hedge fund strategies, the poor performance over the last few months by some top funds, there are even greater risk of trying to replicate hedge fund trades by acting on what they disclose on their 13F filings. First, the 13F filings are filed 45 days after the end of any given quarter and they only show the holdings at the end of the quarter. For instance, this past week saw funds release their 13F’s for the third quarter. If a fund sold a stock on July 1 that they had been holding, those mimicking services and funds would have just found out about it this past week.

One particular stock that the Journal article highlighted was Valeant Pharmaceuticals and it is a perfect case for how much can change in the four and half months between when a quarter starts and when the 13F is filed. From July 1 through November 15, Valeant dropped just over 66%. Some funds sold their shares of Valeant during the third quarter while others increased their stake, but when did they make these moves?

If a fund manager decided to take profits in July, they were selling the stock at a price between $220 and $260. If a fund was selling in the last few days of September, they were getting a price below $180. A mimicking fund or platform that got this information in the past week and had to sell, they were likely getting a price between $70 and $90.

All investment strategies run the risk of falling out of favor at one time or another, but when you are trying to mimic the trades of a strategy but are acting on information that could be as much as four and half months old, you are adding a new level of risk. The Valeant example illustrates that risk very well. That is why the HedgeCoVest platform is a real-time platform that replicates the trades of the fund models within seconds of the fund executing a trade.

Rick Pendergraft
Research Analyst
HedgeCoVest