I'm embarrassed to say that, despite working in the industry, I never really thought about this issue before. In short, are a hedge fund's holdings a trade secret, and - if so - is their periodic required disclosure actually justified?
First of all, some background on what we are talking about here for people not familiar with the business. Firms that hold more than $100m in stocks have to disclose their positions in a quarterly filing. This filing is only a snap shot (like a partial balance sheet), and there is a lot that it will not tell you about the fund. You'll never know about any trading within a quarter, only the net effect at the end. It doesn't disclose short positions, nor any information about options (either long or short). Finally, there is no information about the amount of leverage used (or cash held in reserve).
So, how strong is the case? Well, all the details of a firm's investment activity taken together are certainly a trade secret, and potentially incredibly valuable. These details are the transcript and blueprint of the "product" produced by money managers, namely a series of time-sensitive buy and sell decisions involving a number of different securities (and potentially asset classes). Investors (especially in hedge funds) pay enormous sums to acquire this product; to be forced to disclose all would be to de facto steal from the managers, and also have the investors in the fund subsidize those in the public who would use the disclosures to their own benefit.
So, if disclosing all the investment program details would be so bad, what about the partial disclosure required in a 13F? They are partially bad, and the amount of useful information disclosed varies greatly depending upon the type of fund involved. The most affected are long-term, long-only shops - a careful following of their 13Fs would allow you to almost completely mimic their investment program for free (albeit with a significant lag).
It would seem that, absent some compelling public interest, disclosure should not be required. What, then, is the interest?
Remember that certain other types of disclosure would not be affected if 13Fs were done away with. For example, buying more than 5% of a company's stock would still trigger a reporting requirement. Also, investors in a fund itself could demand certain disclosures, and - if they were not satisfied - refuse to invest and take their money elsewhere. And access to investor lists for things like proxy fights would likewise be unaffected.
In the end, it seems the current disclosures do little other than to feed a need for voyeurism (of which I have been guilty) among professional investors and to satisfy the inertial wants of the regulatory bureaucracy at the SEC. Neither of these reasons strike me as compelling, certainly not enough to appropriate part of the investment program that others are paying so dearly for.
I agree with Goldstein. Am I missing something?