Can You Invest Like a Top Fund Manager?

I am sure that the idea of being able to invest like great and famous investors, like Ray Dalio or Warren Buffett, is really tantalizing for the small retail investor

The cool thing is that if you want to take a closer look at their portfolios, you can actually do that in an easy way. 

In fact, U.S. institutional investment managers with asset under management over $100 million are required to disclose their positions by reporting to the Securities and Exchange Commission (SEC).

The regulation, with its form 13F, require to disclose equity holdings within 45 days of the end of a calendar quarter. Everything is made available to the public on the SEC website, you just have type in the company you are looking for.

Basically you have an inside look at the positions of Wall Street’s top investment managers as an inspiration to generate investment ideas. 

Given that knowledge, I am sure that the first thing you thought was to take all the best and try to put together top portfolios by replicating big investors’ positions.

Well, things are not that easy and straightforward and that replication strategy could be anything but smart. 

Let’s dig deeper on that.

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A matter of information

Although it is really tempting to replicate a top investor’s portfolio, there is a number of problems with that strategy.
How to know if it makes sense to look at their stocks and buy them in your own account?

Let’s start with the 45-days delay.

Funds don’t report their positions immediately, you can access them only 45 days after they had them and usually they wait until the last days to publicly disclose. 

So, if anything happened today, you get to know that almost two months later and in the investing world that is a huge time span.

Having said that, you might look at the positions and see that the price right now is even lower, so why not jumping on that trade?

If you are a smart investor you ask yourself a lot of questions before taking the investment decision. This is exactly the moment when you start to realize how big is the lack of information you have.

The sooner you realize that the information is incomplete, the better. 

Not everything is out there. Hedge funds and big investors operates using also short positionsand derivatives to put up strategies that bet against stocks and create hedges.
Unfortunately, those short positions are not included in the form. The same for bonds, cash, foreign investments and every other derivative.

How are you supposed to replicate a fund strategy if you know only a fraction of it?

In addition, you cannot know to what extent they are exposed to a given stock and what is the reason of the holding of this position in the whole portfolio strategy.

On top of that, the information of 13F forms is not necessarily accurate. Indeed, the SEC can’t analyze all the information to check for accuracy and completeness. Just think that Bernard Madoff filed the form every quarter!

So What?

Hedge funds strategies are really complex and involve huge amounts of data, different securities and positions. 

The truth is that by analyzing a single long position, you simply don’t get the whole picture because you cannot know to what else it is connected and the real reason why it is in the portfolio.

Big investors are not alone like you and me, they have dedicated management teams and staff of hundreds of people working on those strategies, many of them Ph.D. in every sector, not only in finance.

Investing is a lifelong learning process, if you want to invest like them you should at least know what they are doing and given the information available you can easily realize that not everything is out there.

This should help to respect one of the greatest Warren Buffett’s pearls of wisdom:

Rule n°1: Never lose money. 

Rule n°2: Don’t forget rule n°1.

Warren Buffett

When it comes to replicating top fund manager’s portfolios, the way to make smart investing decision is simple. 

Always ask yourself: what part of that transaction I might not see or I might not understand?

This is a test to differentiate between what you know and what you think you know (or, even worse, what you hope you know). 
It helps to make up your mind and say no to many investments, lowering your risk in the season of hedge funds disclosure.


This article is for informational purposes only, it should not be considered financial advice. You can read the full disclaimer here.

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