The Securities and Exchange Commission has proposed a rule that would reduce the number of firms that must disclose their U.S. equity-related securities holdings by nearly 90 percent — a move that drew criticism from companies that have built businesses around such information and market observers who decried a potential loss of market transparency.
On late Friday afternoon the SEC proposed raising the threshold for firms required to report their U.S. equity-related securities via quarterly Form 13F filings with the regulator — from firms with a portfolio valued at $100 million to those managing more than $3.5 billion. This would be the first change to the threshold since the form was adopted in 1978, the regulator said in its announcement of the proposal.
The SEC said it is proposing the change “to reflect proportionally the same market value of U.S. equities that $100 million represented in 1975,” according to the announcement. At that time, about 75 percent of the dollar value of all institutional equity holdings was subject to the reporting requirements, according to the regulator.
If enacted, the change would result in nearly 90 percent of current filers — including hedge funds and mutual-fund firms — no longer being required to disclose their U.S. equity-related holdings, according to a Wall Street Journal report.
Some hedge funds and other investment firms that have found this exercise to be a nuisance have cheered the proposal on social media. However, other firms monetarily benefit from these filings — and they’re arguing it would do more harm than good.
“This is a huge loss in market transparency, and the ‘justification’ seems highly questionable,” said Daniel Collins, founder of WhaleWisdom, which updates 13F and related filings almost in real time and is widely used by the investment community, in an email message.
WhaleWisdom provides research data to funds, retail investors, and academics, as well as tools to that help customers analyze publicly disclosed filing data. One tool, for example, lets individuals see how a portfolio that cloned a fund or group of funds’ 13F filings every quarter would perform.
“Certainly WhaleWisdom would be impacted by the loss of 90 percent of currently fund holding data,” Collins said in the email. “But the real loss is to the main street investor who loses valuable insight and a more level playing field.”
It could also hurt firms like Novus, the portfolio data platform that compiles a comprehensive database of hedge fund stock ownership. It has perhaps the most comprehensive database of hedge fund positions, which it uses to create complex custom reports that it sells investment firms and investors. Novus did not respond to a request for comment in time for publication.
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Mutual funds that try to replicate hedge fund portfolios also rely on the 13F disclosures. The AlphaClone Alternative Alpha ETF, for example, tracks the performance of U.S.-traded equity securities to which hedge funds and institutional investors that AlphaClone rates as having high stock selection skill have disclosed significant exposure.
In an email exchange, Maz Jadallah, founder of AlphaClone, a San-Francisco-based registered investment advisor and equity research firm, conceded that the rule change would reduce the universe of firms to track, though “not necessarily performance.” That said, he is not worried that the proposed change would have an adverse impact on his business.
“A majority of our higher rated funds (based on our rating system) clear the threshold as proposed,” he explained. “I would be very surprised if, in this environment, they increase the threshold 35 times. Even if they do, it looks like there are about 500 filers that exceed that threshold,” he wrote, adding that there is “still a lot of DNA in the 13F gene pool.”
It is not entirely clear how useful the 13F information is. For starters, anyone tracking hedge funds 13F data would be wise to note that these funds have lagged the broader market in recent years.
What’s more, firms are not required to disclose their quarterly holdings until up to 45 days after the end of the quarter, meaning the information may be outdated — and therefore less valuable — by the time it appears. Indeed, several activist hedge fund firms have confirmed to Institutional Investor over the years that they intentionally time their trading activity to avoid prematurely disclosing a position in a 13F document or triggering the 5 percent thresholds for other filing disclosures before they are ready to go public with their position.
Yet, in spite of hedge funds’ reputation for being aggressive traders, the truth is that they are mostly buy-and-hold investors. The average fund turned over 33 percent of its equity positions in the first quarter, according to a Goldman Sachs report analyzing first quarter hedge fund positions. Turnover of the largest positions, however, climbed in the first quarter to just 21 percent, up from the low teens just two years ago, according to Goldman. This suggests tracking 13F filings could be valuable.
“It would definitely make it harder to find needles in haystacks,” a prime broker told II in an email, explaining his disappointment in the proposal.
The SEC will now undergo a 60-day comment period. If the regulator proceeds with the proposal, hedge funds that don’t meet that threshold can still voluntarily file a 13F anyway.
An executive at a hedge fund firm managing less than $3.5 billion said his firm tends to be much more transparent than most hedge funds. “We think that a lot of the secrecy in our industry is a bit silly,” he added, noting it is not an onerous task to put together these documents.
That doesn’t mean the firm wouldn’t take advantage of the change. “We would not report if we weren’t required to do so,” he said.