In the roaring stock market of the 1920’s, it was common for groups of shrewd traders to secretly accumulate big stakes in a stock, then promote it, and drive up the price. When unsuspecting buyers chased the stock higher, the manipulators would sell at a big profit, leaving duped investors with plunging prices. 13D and 13G filings, created by the Securities and Exchange Commission (SEC) Act of 1934, are intended to alert investors that big traders are acquiring a stock. Analyzing these so called “smart money” filings can be be a profitable undertaking.
A Schedule 13D is a document that must be filed with the SEC within 10 days of the purchase of more than 5% of the shares of a public company by an investor or entity. The 13D describes who the investors are and why they have taken a large percentage ownership in the company. 13Ds are filed by “activist” investors, who typically seek changes that will lead to a higher stock price at the targeted company. Activist investors may even attempt to take over the targeted company. 13D filings are often seen by investors as a signal that the targeted stock is undervalued and poised to appreciate.
Schedule 13Gs are filed by entities or individuals who are “passive” investors, with no activist intentions. They’re just regular — albeit large — investors. But hedge funds and other big investors spend lots of money on research. By acquiring 5% or more of a stock, a 13G investor may be signaling that a stock is a good value that won’t be cheap for long.
WhaleWisdom has data on the historical performance of buying and selling securities based on a given filer’s past 13D/G filings.
Not surprisingly, 13D and 13G filings often cause a spike in the price of the targeted stock. Especially if the hedge fund or investor making the filing has a proven history of successful activist investing or stock picking. Stocks targeted by smart money investors with the best stock-picking reputations typically receive the largest post-filing “pop.”
WhaleWisdom maintains data on the performance of stocks that are the subject of 13D and 13G filings. Investors can see the average theoretical performance of stocks securities based on a given filer’s historical 13D/G filings.
Here are the top five hedge funds based one month performance after 13D or 13G filings. Filers must have 50 smart money filings since 2015. The performance data includes amended filings if additional accumulation is reported.
Since 2015 it would have been very profitable to follow Abdiel Capital’s smart money filings
| Name | # 13D/G filings | Avg 1 Month return | Avg Max Gain | Avg Max Loss | Avg Max Gain Days | Avg Max Loss Days |
| ABDIEL QUALIFIED MASTER FUND | 67 | 12.10% | 137.83% | -14.70% | 183 | 57 |
| ECOR1 CAPITAL, LLC | 67 | 10.10% | 70.89% | -33.92% | 81 | 98 |
| GIC PRIVATE LTD | 81 | 9.40% | 42.51% | -24.96% | 105 | 92 |
| CAMBER CAPITAL MANAGEMENT LP | 53 | 8.44% | 64.23% | -33.64% | 111 | 95 |
| GILDER GAGNON HOWE & COMPANY LLC | 69 | 7.70% | 98.87% | -28.20% | 128 | 94 |
It’s no shock that Abdiel Capital leads the pack when it comes to post 13D and 13G filing returns. Abdiel’s concentrated portfolio has generated eye-popping returns. An equal-weighted portfolio of the fund’s top ten holdings has averaged 66.41% three year return. The fund’s 13F portfolio is up 61.93% over the last year despite it’s largest position, Fastly Inc. (FSLY) taking a header over the last few days.
Ecor1 Capital’s 13D and 13G filings have also led to impressive gains on average one month post-filing. EcoR1 founder and Managing Director Oleb Nodelman is has gained notoriety with his unconventional value approach toward Biotech investing.
Chasing a 13D or 13G targeted stock immediately after the filing isn’t always the best course of action.
A word of caution is in order however. Barreling into a stock immediately after a 13D or 13G filing is not always the best course of action. Funds don’t have to disclose their 5% position until 10 days have passed since crossing that threshold. Very often the targeted stock has already advanced significantly in recent days, the fund having driven the price higher accumulating its large position.
Also, filings are typically disclosed after market hours. So the targeted stock is likely to gap higher, especially if a notable smart money player is making the disclosure. Often the extreme near-term strength gives way to a mean reversion pullback. Which would offer a better entry.
Generally speaking, investors would be well advised to first do their own analysis, then if they like the story, scale into an appropriately size position over the ensuing days and weeks.
Disclaimer:
This investment blog (the “Blog”) is created and authored by Mark W. Gaffney (the “Content Creator”). The Blog is provided for informational and entertainment purposes only (collectively, the “Blog Service”). The information in the Blog constitutes the Content Creator’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You understand that the Content Creator is not advising, and will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in the Blog may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.
From time to time, the Content Creator or its affiliates may hold positions or other interests in securities mentioned in the Blog. The Content Creator or affiliates may trade for their own account(s) based on the information presented, and may also take positions inconsistent with the views expressed in its messages on the Blog.
The Content Creator may hold licenses with FINRA, the SEC or states securities authorities. These licenses may or may not be disclosed by the Content Creator in the Blog.
Investing in the investments discussed in the Blog may be risky and speculative. The companies may have limited operating histories, little available public information. The stocks discussed may be volatile and illiquid. Trading in such securities can result in immediate and substantial losses of the capital invested. You should only invest risk capital not required for other purposes, such as retirement savings, student loans, mortgages or education.
