Winning the loser's game

August 25, 2015 09:00 AM

Have you ever watched the World Series of Poker and thought how easy it would be if you could see your opponents’ cards like you can on TV?  It would feel amazing to know what the others are holding and to strike when the opportunity arises. How about in the stock market? If you knew how top investment managers were investing, would you be more successful? Well, we’re not aware of any poker table that allows that, but you can do it in the stock market.

August 14 marked the deadline for second-quarter 13F fillings. The 13Fs are disclosures that the Securities and Exchange Commission (SEC) requires under SEC Rule 13f from any manager that exercises investment discretion over $100 million or more in marketable securities. The filings are required within 45 days after each quarter. They reflect investment managers’ ownership interests in companies traded on U.S. exchanges. They’re publicly available, and the data can be enormously helpful in giving everyday investors insight into the decisions of the leading hedge-fund managers.

PAR Capital Management, a $3 billion Boston-based equity hedge fund founded in 1990 by Paul Reeder III, started by specializing in the airline and travel industries before branching out into other industries—including gaming, which now represents over 20% of its portfolio. Here’s how they describe their investment style: “Our philosophy is based on the belief that long-term investment success can be achieved through narrowly focused and rigorous fundamental research, disciplined portfolio management and the alignment of incentives between manager and client.”

Once PAR assumes a large position in a company it takes an activist role by taking control of board seats and pressing for change. Its largest investments in the gaming industry now include Global Eagle Entertainment (ENT) and Churchill Downs (CHDN).

For an everyday investor wanting to profit from hedge fund managers’ investments, replicating their portfolios is the best option. Replicating top managers’ holdings avoids the high fees, lockup periods and lack of transparency associated with hedge funds, yet provides access to their investment expertise.

“Following the leader,” displays the results an investor would have experienced by replicating PAR Capital Management since May 2001. By equal-weighting its top 20 holdings and rebalancing at the 13F filing deadline, just four times a year, an investor would have earned compound annual returns of 16.4% vs. 5.4% with the S&P 500.  

Why hang on the pronouncements of financial pundits on the financial talk shows? They’re not tied to the outcomes of their predictions. Instead, why not replicate the portfolios of the iconic investors by following their actual investments?

About the Author

Brent Plunkett is the co-owner of and CEO of Charter Wealth Management.  WhaleWisdom helps investors research and replicate the portfolios of top hedge funds through their publicly available SEC disclosures providing access and tools to invest like a Wall Street money manager at a Main Street price.