The Hedge Fund Whisperers: Hints For Retail Investors To Unlock Alpha

SMSFundamentals | May 02 2024

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Hedge funds have long been shrouded in secrecy, their billion-dollar bets whispered only in hushed tones within mahogany-lined conference rooms. But these whispers can be harnessed for the astute retail investor, their secrets decoded to generate market-beating returns. This game of shadows and whispers requires meticulous research and a willingness to take calculated risks. It's a realm where the rewards are high, but so is the potential for missteps.

By Omega Ukama

Legal, Accessible Sources: The Data Treasure Trove

The pathways to deciphering these once-hidden hedge fund strategies start with the trails left within legal and accessible sources. A company's share register is the most obvious source. This legally mandated record reveals the nitty-gritty of ownership: who holds shares, the quantity, and their share class. Contact the company's investor relations or company secretary for access.

For a more streamlined approach focused on trends, start with the ASX website. It often provides a snapshot of major shareholders. Notice any sudden appearances or exits of hedge funds? Perhaps a fund steadily increased its stake in a company prior to good news and a stock price surge?

Financial data providers like Bloomberg or Morningstar are your go-to tools to uncover deeper patterns, especially historical trends and institutional holdings. These can help identify patterns like concentrated hedge fund buying in a sector (think mining stocks during commodity booms).

Of course, to hunt for hedge funds, you'll need a starting list of suspected funds. Also, don't forget shareholder information can be obscured through proxies, making your search for hedge fund activity in share registries even more meticulous. Yet, the potential insights gleaned from this type of analysis can be well worth the effort!

13F filings in the US can also be useful and may simplify the search, but they don't provide a complete picture as external sources. 13F filings mandated by the SEC can disclose US hedge fund holdings with a 45-day delay, but with the potential of revealing much about trends. A rise in tech holdings after a major market correction may signal a belief in long-term recovery. This was seen in 2008-09 when hedge funds accumulated quality stocks during the downturn.

Comparing 13Fs across multiple quarters is key to spotting these patterns.

The SEC's EDGAR Database is the official and primary source for 13Fs filings. Look for filings designated as "13F-HR" (the main 13F form) or "13F-HR/A" (amendments to a previous filing). Many financial websites also offer tools to search, view, and analyse 13Fs, often with additional features for convenience. Some popular options include Nasdaq, WhaleWisdom, and Dataroma. The paid options offer deeper analysis and larger-scale data, including historical information, analysis tools, and APIs for integration.

Beyond the obvious limitation they don't reflect an institution's real-time holdings, 13Fs are also limited in that they only report long equity positions above US$100m and don't include short positions, options, or other holdings.

Public announcements can also be useful. Very rarely, a hedge fund might be required to disclose a position if it crosses certain thresholds in a publicly listed company's ownership. Again, foreign sources are your best bet, it's very difficult to find direct announcements by Australian hedge funds specifically detailing their ASX activity.

Short Interest Figures

Hedge funds don't just play the long game. Focusing on short interest reveals their bearish bets and potential opportunities to capitalise on those positions.

Short interest figures tell us how heavily a stock is being bet against. A spike in short interest, especially concentrated in hedge fund hands, can be a powerful bearish signal. In the "meme stock" frenzy of 2021, hedge funds initially piled into the short side, indicating scepticism. When the short squeeze occurred, those heavily shorted companies like AMC and GameStop saw outsized price gains.

The ASX is the primary source for short interest information locally. However, it's good to know this shows aggregate short interest, not broken down by investor type and discerning the specific contribution of hedge funds to this overall figure can be challenging.

ASIC also releases reports on short positions exceeding a reporting threshold, but again, it won't distinguish between hedge funds and other investors. FNArena has a dedicated section with input and updates from ASIC:

Some financial data providers (e.g., Bloomberg, Refinitiv) might offer more granular short-selling data in their subscription-based services. They still don’t isolate hedge fund activity perfectly, but they provide more advanced filtering options.

Again, external sources will give you a clearer picture, but limited to foreign players. The short interest report on the SEC website provides in-depth analysis.

If a stock has an unusually high short interest percentage, it's more likely to have hedge fund involvement. However, it's not a guarantee.

Beyond the numbers

Beyond these data sources, hedge funds often participate in company earnings calls, asking probing questions. Transcripts or recordings of these calls can contain insights beyond the usual financial metrics, revealing areas of interest for hedge funds.

Start your search on the company's investor relations website. These sections (often labelled "Investors" or "Financial Information") are your go-to source for official transcripts and sometimes even audio or video recordings.

If you prefer a broader approach, check out financial websites like the Australian Financial Review (AFR) or MarketWatch. For serious research power, tap into financial databases like Bloomberg, S&P Capital IQ, or Factiva – they're where you'll find comprehensive records.

While not always containing the recording directly, the ASX Announcements Platform can be useful. Search for company announcements related to earnings releases. These announcements might include a link to the transcript or a webcast on the company website.

Focus on recent calls for timely insight. Transcripts are easier to search if you're looking for specific topics.

Tracking news mentions of stocks alongside hedge fund holdings can also hint at catalysts behind their trades. Tools like HypeEquity measure social sentiment, potentially highlighting a stock gaining traction before hedge fund filings reflect it.

Industry-specific resources such as The Hedge Fund Journal also offer news and analysis.

Some (but not all) hedge funds might have a website with a news or press release section. Infrequently, they may mention significant ASX activity.

Decoding Hedge Fund Sentiment: Contrarian Moves and Protecting Your Portfolio

Think of hedge funds as the stock market's adrenaline junkies. They fuel wild rallies, then panic at the first sign of trouble, amplifying price swings. But within this chaos lays opportunity for the savvy investor. When the crowd stampedes in one direction, it might be your signal to look the other way.

During the "meme stock" craze, hedge funds initially piled into the skyrocketing stocks. Retail investors jumping in late got burned when the bubble burst. Contrarians, however, might have spotted the frenzy as a sell signal, profiting from the inevitable crash. This phenomenon highlights the dangers of "momentum trading" and the value of a contrarian stance.

Of course, spotting those diamonds in the rough, undervalued companies discarded during the hedge fund fire sale, takes critical analysis. During the pandemic's initial market plunge in 2020, quality companies were thrown out with the bathwater. Those who saw beyond the short-term fear and bought solid names at a discount adopted a contrarian play. Warren Buffett famously advocates this "be greedy when others are fearful" approach.

The key to navigating this volatility? Diversification. Don't put all your eggs in the hedge fund frenzy basket. Spread your investments across different sectors, and asset types – even include some boring but reliable bonds. This way, even if the hedge funds wreck part of the market, your portfolio has a built-in safety net.

Hedge Fund Footprints: ASX

Data show hedge funds do operate on the ASX, but their overall footprint is smaller compared to major markets like the US. Domestic institutional investors (superannuation funds, etc.) play a much more significant role.

Hedge funds tend to gravitate towards sectors where they have specialised expertise such as Mining & Resources; Tech & Innovation; or Biotech.

In March, AFR reported hedge funds scrambled to exit over a billion dollars worth of short positions on ASX stocks. Imagine being a hedge fund with a big bet against a struggling ASX stock – a short position. Now, imagine the market suddenly turning against you. That's what happened, supposedly.

It triggered a nasty short squeeze, especially hitting those beaten-down lithium and nickel companies. Think of it like a chain reaction – as shorts raced to buy back shares, prices skyrocketed, squeezing short sellers even more.

Think of such coverage in the media as a snapshot in time. Hedge funds are notorious for rapid changes, so this February squeeze doesn't necessarily dictate the current landscape on the ASX.

Browsing recent 13Fs, through financial websites like HedgeFollow, I found some interesting data points about hedge fund activity on the ASX.

Lithium is hot, and Pilbara Minerals ((PLS)) is a major player in the sector. TipRanks painted a picture of potential hedge fund interest – it showed several funds holding the stock. However, keep in mind, we don’t know if those funds still hold them today. Data insights are always trailing behind the hedge fund fast lane. Think of it like a blurry snapshot of interest, not a confirmation of current activity.

In the financial sector, Magellan Financial Group ((MFG)) appeared less popular with the hedge fund crowd compared to a hot stock like Pilbara Minerals. One easy to make observation is the news flow surrounding Magellan has become a lot less negative and the shares are trading well off their lows.

Pivoting to infrastructure with Transurban Group ((TCL)). 13Fs, while not the perfect tool for ASX stocks when considered in isolation, hint at a possible decrease in hedge fund interest. Holdings in Transurban might be shrinking. This trend might reflect views on expected bond market and interest rate moves ahead. Transuban shares are equally well off their low from October last year, but also now noticeably down from December-January share prices.

This is an investigative process, not a crystal ball. Even if we spot signs of hedge funds buying into or abandoning a stock, that's just one puzzle piece.  Always couple these clues with your in-depth analysis of the company itself.

The Art of the Tailwind

Harnessing insights from hedge fund moves is about becoming a more informed investor.

Use the data to complement your existing strategies, spot potential turning points, and discover ideas that may be flying under the radar.

Success lies in combining rigorous analysis with a healthy dose of scepticism, allowing to leverage the whispers from the hedge fund world strategically.

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