Portfolio managers can’t pick stocks – this is a common saying in the popular press and between proponents of index investments. But research shows it is not such an evident truth. Mutual/hedge fund managers, in reality, can pick stocks but are often too diversified, and their “best picks” therefore cannot deliver such a spectacular performance as the fund’s performance is dragged down by the rest of the portfolio.
The 13F Fillings Following system is based on the assumption that stocks in which mutual fund managers (and hedge fund managers) are mostly concentrated (their best ideas) are stocks that will outperform the broad equity index. SEC 13F fillings could be used to track top holdings positions in mutual funds.
Mutual fund managers must have highly diversified investment portfolios as current investment doctrine doesn’t recommend highly concentrated portfolios, and most investment managers have fear to divert significantly from the relevant benchmark.
But stocks which are managers’ “best ideas” (high-conviction positions) are often over-weighted in their portfolios. These are also usually stocks which are most understood by those managers. It is, therefore, fundamentally feasible to track those “best ideas”.
Backtest period from source paper
Confidence in anomaly's validity
Notes to Confidence in Anomaly's Validity
Notes to Indicative Performance
per annum, 1.26% monthly alpha (geometrically annualized) over 4% risk free rate (estimated risk free rate), performance from table 2
Period of Rebalancing
Notes to Period of Rebalancing
Notes to Estimated Volatility
Number of Traded Instruments
Notes to Number of Traded Instruments
it depends on investor’s need for diversification (10-100)
Notes to Maximum drawdown
Moderately complex strategy
Notes to Complexity Evaluation
Simple trading strategy
Create a universe of active mutual fund managers. Use 13F filings to identify the “best idea” stocks for each manager. Invest in the stocks, which are the “best ideas” for most of the managers.
Hedge for stocks during bear markets
No - The selected strategy is designed as a long-only; therefore, it can’t be used as a hedge against market drops as a lot of strategy’s performance comes from equity market premium (as the investor holds equities, therefore, his correlation to the broad equity market is very very high).
Out-of-sample strategy's implementation/validation in QuantConnect's framework