Complain about the American financial system all you want, but you have to admit that its disclosure requirements are unparalleled. Company filings are made in machine-readable formats, the SEC literally tells you how to scrape them, and it's illegal for executives to share material information with outsiders unless they immediately disclose it to everyone.¹ And, on top of that, investment managers must file a Form 13F every quarter to disclose their positions for all the world to see—a world that definitely includes coattail-riders who would like to invest alongside a great manager without paying them massive fees.

But that last sentence needs a couple asterisks: not all managers have to do this; not all of their positions get disclosed; the timeliness of these disclosures makes their utility variable; and some of the disclosures, particularly around options, are pretty easy to misread. You can still get some utility out of 13Fs—how could it not help, at least a little bit, to look over the shoulder of the investor of your choice!?—but doing so is a process of elimination, getting rid of all the ways a 13F might mislead you.

Let's take them one at a time:

Not all managers file 13Fs: the SEC has a nice FAQ here, and the gist is that you do have to file one if you manage more than $100m worth of stocks, closed-end funds, and ETFs traded on US exchanges. This ends up being a weird dragnet: Zoom files them, because it has substantial investments in a handful of companies; Palantir does, too, because it took equity as partial payment for sales to smaller companies. But family offices or rich people, who are managing their own money rather than that of outside investors, usually don't file 13Fs. (Though they can trigger other filing requirements, if they buy more than 5% of the outstanding shares of a company or if they serve on a board.)²

13Fs are not real-time: firms need to file based on their holdings at the end of each calendar quarter, and the filing deadline is 45 days after. Since information is an advantage, companies file at the end of the deadline.³ So: 13Fs from highly-concentrated long-only funds will contain useful information; there are still some classic value investors out there whose portfolio is four microcaps you've never even heard of and whose ten-year track record is 20%+. There are also some large funds that focus on quality companies and buying at opportune times (by determining whether a drop in price is a short-term stumble or a negative inflection). But at the other end of the spectrum you’ll have a multi-manager platform fund like Millennium or Citadel, that will have turned over its entire portfolio in between the end of the quarter and the filing of the 13F. And, yes, you can see a list of 12,000 positions Jane Street had on at the end of a quarter, but these turn over even faster. The best you can do here is to see which companies and sectors a high-turnover fund is interested in. But in general, if it's a fund you've heard of, the answer is "literally all of them."

And on that note, 13Fs do not show swaps or short positions, and they only disclose options in a very easy-to-misread format.

Let's start with swaps: an investor can take a position by buying shares, but can also take an equivalent position by signing a deal with a bank where the bank gives them the equivalent return of having that position (the bank will generally hedge this by actually making the underlying trade). Why would a fund do this? Perhaps it's the best way to get the leverage they want, or perhaps they're not interested in disclosing the full size of their position. In fact, sometimes the swap position can be the reverse of the disclosed position: a fund might arrange to short, say, 2% of the outstanding shares of a company over a one-year period, and then buy 1% of the shares from someone else. That way, they're net short 1% of the company right now and can short more if the opportunity changes.⁴ Meanwhile, the short position itself is not disclosed at all in 13Fs. The more levered a fund is, the more likely they are to have shorts roughly offsetting their longs, and you never know where they expect the alpha to come from: someone who just went long a basket of regional banks might have done so to hedge a single big position shorting a different regional bank.

For options, the story is even more complicated: options positions get reported in 13Fs based on the notional value of the position. But that value sets an upper bound on the value of the options themselves. For example, suppose someone's 13F discloses a $900m position in put options on the S&P 500. This could, in theory, mean that they paid up to about $450m (if they bought far in-the-money puts expiring in late 2025) or it could mean a sub-$1m trade (put options betting on a 4.2% drop in the next ten days go for 1/1000th of the notional value protected by those options). There is simply no way to tell where the trade is between these two extremes, though the best inference you can make is that if a trade has a surprisingly large notional amount, it's probably far out-of-the-money.

So, if those are all the ways you might misread a 13F, how can you usefully read one?

The first step is to realistically assess which strategies you're pursuing, and then figure out which respectable investors run those strategies. If you get a good idea from someone who has a different strategy from you, you have decent odds of being the liquidity provider when they decide to exit. And some investors use multiple strategies; Berkshire owns Apple as an affordable growth stock, but has Activision as a merger arb play—if you like reading balance sheets but don't like handicapping prop bets about legal cases, the Activision position shouldn’t mean much to you. It can help to find someone who has talked about their process publicly, so you understand what they’re probably thinking with each position, but note that the better-known they are, the more people there are who are following the exact same 13Fs.

Within strategies, the smaller the cap the better: large-cap growth stocks have their own system by which information percolates; if a big growth fund is taking a position or liquidating one, the knowledge of this has percolated through the Midtown and Palo Alto rumor mill long before it hits the 13F. If it's a big enough position to matter, it even makes the news ($, FT). Small-cap investing is still densely-networked, but it's a slower-twitch practice; repeatably making 5% gains on small-caps is not a strategy that scales well, but someone who can do that well can make plenty of money for a large cap-focused fund.

Next: new names listed in 13Fs are, in general, a starting point for research, not an ending point. The goal is to figure out what that investor sees in the business. This can be done when the investor has a known thesis, like buying companies with pricing power, investing in turnarounds, or timing the cycle in various commodities.

It can be especially interesting to sort positions by how much of the shares outstanding the fund bought, rather than by the size of the position. If a $5bn fund buys 5% of a $500m company, that's an immaterial position, and an illiquid one—which means someone internally had to really push for it.

13Fs can also be good for risk management: some ideas tend to spread from one fund to another, and if all of these funds are levered, they sometimes need to sell all at once. This makes the 13F a risk management tool, and a way to see whether the stock is in diamond hands (most insiders, index funds, some large long-only funds) or people who will immediately fold. The even more aggressive version of this is more situational: when a big fund is in trouble, their biggest positions, relative to shares outstanding, tend to get hit hard. Someone who is agile and mercenary can profit from this; there was a moment in January 2021 when some of Melvin's positions, like Expedia, Advance Auto Parts, and L Brands, turned into indirect proxies for GameStop.

To the extent that there was ever alpha in blindly following 13Fs, it's doubtless been arbitraged away by systematic investors. They aren’t just estimating the first-order impact ("this smart person is buying, so it's a good buy"), they’re estimating the second-order ones ("the rest of their stocks are doing well enough that they'll continue to raise money, so the outperformer will be the least liquid stock they own"). But there can be fun discoveries, especially among small positions taken by large firms. But 13Fs aren't a shortcut; they're a starting point. And the best-case scenario is still getting a rough approximation of someone else's idea, and getting it late.

Read More in The Diff

13Fs are not just an idea source for investors; they also work for newsletters! Some 13F-inspired posts from The Diff:

• This Bowlero writeup ($) was prompted by asking: "Wait, Soros' fund invested in a bowling SPAC?"

• And this writeup of Lamb-Weston ($) was, similarly, prompted by wondering why so many growth funds were investing in the potato business.

• This piece ($) posted in the midst of the GameStop saga looks at the mechanics of hedge funds exiting positions en masse.

• In this short piece ($), The Diff looked at a proposed change in the rules for which companies would need to file 13Fs.

1. For example, one time Netflix's CEO got a Wells Notice from the SEC because he posted about a viewer-hours milestone on social media but didn't share it through the usual channels.

2. One pattern that sometimes shows up in asset management, and that nearly always irritates the people whose assets are being managed, is that a manager will have a side vehicle that just runs their own money, and that often takes more risks but also makes more money than the main vehicle they offer. Renaissance Technologies is probably the most prominent example of this, though they did it in the opposite order: they started out with a regular fund, gradually redeemed outside investors' stakes, then launched an institutional investment vehicle that uses different strategies and doesn't make nearly as much money.

3. So if one of your finance friends seems a little depressed on Valentine's Day, it might not be a problem in their personal life—they might have learned that one of their competitors probably made a ton of money over the previous 45 days in something they ignored.

4. In this instance, one way to think about the bet is that they're simultaneously betting that the stock will go down and that the cost to borrow it for short sales will go up.

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