What Is SEC Form 13F?
The Securities and Exchange Commission's (SEC) Form 13F is a quarterly report that is required to be filed by all institutional investment managers with at least $100 million in assets under management. It discloses their equity holdings and can provide insights into what the smart money is doing in the market. However, studies have found that 13F filings also have serious flaws and can't be taken at face value.
- The SEC’s Form 13F must be filed quarterly by institutional investment managers with at least $100 million in assets under management.
- Congress intended these filings to provide transparency on the holdings of the nation’s biggest investors.
- Smaller investors frequently use these filings to determine what the “smart money” is doing in the market, but there are serious problems with the reliability and timeliness of the data.
Understanding the SEC's Form 13F
Congress created the 13F requirement in 1975. Its intention was to provide the U.S. public a view of the holdings of the nation's largest institutional investors. Lawmakers believed this would increase investor confidence in the integrity of the nation's financial markets. Firms that are considered institutional investment managers include mutual funds, hedge funds, trust companies, pension funds, insurance companies, and registered investment advisors.
Because 13F filings provide investors with a look at the holdings of Wall Street's top stock pickers, many smaller investors have sought to use the filings as a guide for their own investment strategies. Their rationale is that the nation's largest institutional investors are not only presumably the smartest, but their size also gives them the power to move markets. So investing in the same stocks—or selling the same stocks—makes sense as a strategy.
Key Issues With Form 13F
Smaller investors who want to replicate the strategies of rock star money managers like Daniel Loeb, David Tepper, or Seth Klarman scrutinize 13F filings. And the financial press often reports on what these fund managers have been buying and selling by comparing changes in quarterly filings. But there are a number of problems with 13F filings that warrant caution.
The SEC has acknowledged problems with the reliability of the information on 13F forms.
13F has drawn criticism from many groups who claim it provides a loophole for hedge fund managers. In fact, in a 2010 statement, the SEC itself acknowledged the form had many problems and recommended a number of changes should be made in order to ensure "useful and reliable data is provided to the public and government regulators."
The SEC's internal review also noted that although "the SEC would be expected to make extensive use of the Section 13(f) information for regulatory and oversight purposes, no SEC division or office conducts any regular or systematic review of the data filed on Form 13F."
Perhaps this explains how infamous fraudster Bernard Madoff dutifully filed 13F forms every quarter and still ran a successful Ponzi scheme.
Another frequent criticism of the form is the fact that it only requires fund managers to file 13F reports 45 days after the end of each quarter. Most managers submit their 13Fs as late as possible because they do not want to tip off rivals to what they are doing. By the time other investors get their hands on those 13Fs, they are looking at stock purchases that may have been made more than four months prior to the filing.
In a March 31, 2021, letter to Allison Herren Lee, the acting chair of the SEC, the progressive nonprofit Americans for Financial Reform urged the SEC to "expand both the frequency of Form 13F reporting and the range of financial products required to be disclosed on this form."
Another group, the National Investor Relations Institute, recommended the SEC implement a monthly reporting of ownership positions along with a 15-day window.
One risk for both professional and retail investors is the tendency of money managers to borrow investment ideas from one another. Hedge fund managers are no more immune to behavioral biases than anyone else. After all, if you are a fund manager, it is safer to be wrong with the majority than wrong alone. This can lead to crowded trades and overvalued stocks. And if small investors are late to the party getting into a trade, they are likely to be late getting out.
An Incomplete Picture
Another issue with 13F filings is that funds are only required to report long positions, in addition to their put and call options, American Depositary Receipts (ADRs), and convertible notes. This can give an incomplete and even misleading picture, because some funds generate most of their returns from their short-selling, only using long positions as hedges. There is no way to distinguish these hedges from genuine long positions on 13F forms.