Elite hedge funds added to these high conviction positions during the December panic

Question: If you’re a top hedge fund manager and the value of your highest conviction stock suddenly drops by 20%, what do you do? Answer: You buy more.

Late in 2018, investors panic-sold en masse. Indiscriminate selling. Babies thrown out with bathwater. While the public freaked-out about interest rates, trade wars and recessions, leading hedge funds added to their best ideas.

And luckily for investors, if a hedge fund owns 5% or more of a public company, the SEC mandates that it must promptly disclose further holdings changes of 1% or more. “Promptly” is generally understood to mean within two business days. If a fund has previously filed a 13G (a passive investor) or a 13D (an activist investor), denoting 5% ownership, further 1% holdings changes will be quickly seen by investors monitoring SEC filings.

For the savvy investor, studying amendments to 13D and 13G filings can be a treasure trove of information. Hedge funds spend extensive time and money on research. We can presume that if they average down on a top holding, they still like the story.

So, here’s an interesting approach: Follow the best hedge funds, with the smartest managers and leading performance, and when there’s a market downdraft, see which of their 5% holdings they add to – or sell. Below we did just that.

First, we used WhaleWisdom.com to identify the best performing hedge funds over recent years and months. We did this by comparing WhaleScores – a ranking of funds that calculates risk-return performance measures over recent periods and may predict future outperformance. Note that most of the hedge funds on the list are relatively small and obscure. Why? Because small, less well-known hedge funds typically outperform the larger, more famous ones.

Then we pulled up 13D and 13G filing amendments of these top funds since Dec. 1 – when the market panic began to intensify. We eliminated funds with less than 10 holdings. We also included top funds that reduced holdings in 5%+ positions. As always, do your homework before investing.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the article.