This month, the SEC announced some major proposed changes to the 13F filing. Specifically, they are looking to change the reporting requirements from any fund with greater than $100M in AUM (as it has been since the 70’s) to funds with at least $3.5B – a significant leap, but it makes sense given that the $100M threshold was set over 45 years ago. So significant in fact, that it will reduce the number of Hedge Funds reporting their holdings by over 90%. Yes, it will still capture the titan funds, but it will still mean a lot less information about clients.
When I hear something is changing, especially legislation, I always find it insightful to see why that legislation was created in the first place. For anyone who wasn’t around in 1975 for the Form 13F inception, you may be surprised by its intention:
“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.” – SEC
That colours the above change well. It’s only supposed to cover the largest institutional investors (and that clearly isn’t the case with a $100M threshold). It’s always interesting to see how intentions hit reality. Even in the age of free trading on Robinhood, I think it’s pretty safe to say that the public isn’t pulling 13F filings all too often – and I don’t think the 13F filings really impact their confidence in the nation’s markets. That being said, the industry has become voracious consumers of the data.
It is fascinating how the uses of 13F filings have evolved, and how many different parties now leverage them in ways that were likely well beyond the intended use cases back in 1975 when the $100M threshold was set. It has become a key data set to understand what funds are investing in and interested in. Some of the use cases I’ve seen:
Brokerages using 13Fs to communicate and target order flow/blocks
Brokerages using 13Fs to target corporate access events/invites
Brokerages using 13Fs to target deal distribution and placement
Corporates using 13Fs to find funds holding their competitor’s stock (or even going one step further to find funds that may be interested based on analysis of all their holdings)
IR Solutions using 13Fs to help highlight opportunities on non deal roadshows
Data providers using 13Fs to build indexes to highlight ‘crowded trades’, sentiment, momentum, and other indicators
CRM’s using 13Fs to augment client profiles and add inferred ‘interests’ – one of the most popular CRM feeds to buy is 13F filings
The list really keeps going on and on – 13Fs have been a massively valuable data set to infer what a client might care about. It’s not perfect: it’s 45 days delayed from the end of the quarter, funds sometimes ‘window dress’ it to hide their true intentions, but it’s a lot better than no information at all.
To me, the SEC is missing this unintended use case, and thus missing the biggest downside: targeting. The 13F data is used by all kinds of industry participants to target outreach – whether to investors, corporates, or brokers. Even though the largest funds will continue to report their filings per usual, those funds are so large and complex that it’s almost impossible to know where those assets actually sit, and who to reach out to.
So, what happens if the information available through the 13F filing gets massively reduced – what will all those firms do that rely on the information found in those filings? It will be a challenge.
The biggest change that this is going to accelerate is forcing firms to generate their own client intelligence, and limit their reliance on public data sets (like 13F). Firms will have less 3rd party data to lean on, and will have to focus on generating their own through the channels they have: in-person meetings (which are on hold), telephone calls, and instant messaging. They will then need to make sure the data generated from these channels is captured, indexed, organized, and logged into a central system like a CRM.
While there are no in-person meetings happening right now, that has become one of the biggest sources of data over the last few years (individuals would log the meeting notes in the CRM upon their return, to share with the firm). Instant messaging is owned by Bloomberg, and unfortunately for its users, CRM integration doesn’t seem to be on their roadmap (but I could be wrong). The interesting two to me are calls and email (the latter being a selfish interest) – channels that haven’t historically been leveraged, but are getting a lot more attention now (especially with everyone working remotely).
Calls are an area of massive innovation – firms like Cloud9 are plugging into industry telephony systems (like Brokerage turrets), recording calls, transcribing them, and using that transcript to update the CRM, compliance systems, etc. If someone mentions on a call that they are interested in digging into MSFT, you can programmatically log that.
Email is also an area of low hanging fruit. While email is undoubtedly the largest industry communication channel by volume, much like the 13F filing, it hasn’t changed much since inception. That being said, new tools are emerging (shameless plug: like Street Contxt) that are helping firms generate email intelligence to better understand engagement, and leverage that intelligence to better engage with and cover clients.
No matter how you look at it, the 13F filing is going to reduce the amount of publicly available ‘interest’ data, and force firms to focus on generating their own client intelligence. In order to do that, firms need to look at the communication channels they have with their clients, and what data they can source from each of those channels.
As one source of data diminishes, firms will need to lean in on others. While it’s great to have access to public data sets, firms should increasingly look to build their own client insights and intelligence, providing them a competitive advantage when it comes to serving their clients, and giving them a better experience than the competition.
As always, don’t hesitate to reach out if you have any questions,