Tracking A Hedge Fund's UK Positions ~ market folly

Monday, September 14, 2009

Tracking A Hedge Fund's UK Positions

Before we continue to look at the positions prominent hedge funds hold in UK markets, we thought it would be prudent to post up an informational piece regarding the nature of the UK regulatory system as it applies to hedge fund disclosure. Firstly, there is no UK equivalent to the SEC’s 13F filing in which funds have to file their holdings on a quarterly basis here in the United States. In the UK, hedge funds do not have to file on a periodic basis at all. Instead, large shareholders are only required to flag long holdings that are greater than 3% of a company’s issued equity. This means that small hedge funds often do not register on the filing radar at all unless they invest in very small companies. Large funds on the other hand often leave a footprint and we can track their activities with ease (particularly when they are buying small and medium sized companies). Their investments in large cap companies, however, often go (legally) unreported and unnoticed because they do not trigger the 3% threshold. This is most similar to an SEC 13G filing (or 13D filing sans the activism) in the United States whereby a fund has to disclose after they have acquired a 5% or greater ownership stake in a company. We routinely cover 13G filings here at Market Folly and these UK filings can be regarded as their regulatory version of a 13G.

In the UK, once a fund crosses above 3% of a company’s equity in issue it has to report any further changes at 1% increments (regardless of whether it is a purchase or a sale). For example, if a fund moves from 3 to 4% of equity in issue or from 4 to 5, they must report. They must also report sales, for example, from 7 down to 6% until it gets below the 3% threshold where one final filing is required to acknowledge that the fund no longer has a concentrated ownership stake.

The additional filings made at 1% increments are interesting because the funds have to provide the trading date on which the threshold was crossed. This date can then be used to make a rough estimate of the price the fund was willing to pay for a company. Arguably, purchase price information is particularly useful if the fund being tracked is well known for excelling at fundamentally driven or deep value research. It is perhaps less meaningful if the fund follows momentum driven investment strategies such as those used by many Commodity Trading Advisers as these funds often move in and out of positions with much more alacrity and disregard for valuation.

Finally, just like in the United States, we can only provide information on a fund's long positions in UK markets. Short positions do not have to be disclosed except if they are in financial companies or companies involved in rights issues. We will cover the UK disclosure rules on shorts and disclose some hedge fund short positions in a later article, so stay tuned.

Hopefully this gives everyone unfamiliar with the subject a brief background on how regulatory disclosures work in the UK. Now that we've presented this preface, look for more articles relating to various positions hedge funds hold in UK markets going forward. We've already covered Lone Pine Capital's UK holdings, Lone Pine's recent movements, Sprott Asset Management's defensive UK portfolio, as well as Citadel's positions. Then later this morning we’re also going to take a look at the UK holdings of legendary macro investor, Louis Bacon. And, as always, we'll continue to track the US holdings of prominent hedge funds in our portfolio tracking series, so check back daily.

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