For investors, it appears doing your homework does trump dumb luck.
Hedge funds that frequently accessed SEC filings such as annual reports posted better-than-average returns in the following month compared with non-users, according to a new academic study.
The working paper from Rice University finds that funds accessing one or more SEC filings in a month exhibit 1.5 percent higher annualized abnormal returns in the subsequent month and that above-median users generate 2 percent higher returns per year.
"The fact that public information acquisition relates to performance is surprising. SEC filings are the very definition of 'public' information, and therefore, usage of such information should not be profitable," wrote researchers Alan Crane, Kevin Crotty and Tarik Umar. "Overall, our results are less consistent with the view that hedge funds have a processing advantage and more consistent with the view that public information complements private signals."
By mapping hedge fund internet protocol (IP) addresses to those accessing financial filings at the SEC, the team identified public information acquisition by hedge funds such as Renaissance Technologies, PanAgora and AQR. Perhaps most surprising, the researchers found the median fund-month download amount is only four filings while the mean was 672, suggesting that relatively few funds are accessing vastly more information.
Source: Crane, Crotty & Umar (2018)
Variation in the use of public information also differed widely across and within hedge funds, as well as by type of filing. For an average fund-month, financial statements comprise roughly 33 percent of total downloads, while 8-K disclosures (major event announcements) account for another 20 percent.
Renaissance Technologies and BlackRock were among the top users of filings on the government's Electronic Data Gathering, Analysis and Retrieval system, the researchers said, with over 3.7 million EDGAR downloads each since 2003.
Of course, the Rice University researchers are not the first group to have questioned if hedge funds are really doing their homework.
A 2017 Notre Dame study found that the average firm's annual report is requested only 28.4 times through the EDGAR database. A February 2018 study by Yale and AQR found that hedge funds trade more aggressively — and more profitably — in stocks with less sell-side analyst coverage, when greater information asymmetry benefits sophisticated investors.
The Rice paper comes as some of the country's renowned fund managers known for doing their homework struggle for the historically high returns to which they're accustomed. David Einhorn's Greenlight Capital fund, for example, returned just 1.6 percent in 2017, while Bill Ackman's Pershing Square lost 4 percent over the year, according to its website.
Einhorn explained that his fund's underperformance was the result of a temporary market issue, while some have speculated that the rise of computerized trading has taken much of the low-hanging, numbers-based valuation opportunities away. In other words, publicly available information may be better disseminated thanks to automation.
"Despite it being a good year in the market, it was a challenging environment for our investment style," Einhorn wrote to clients in February. "We have a value orientation and we take comfort from the margin of safety afforded by the low valuations of our long investments … while we certainly don't believe value investing is dead, it is clearly out of favor at the moment."
To be sure, the SEC's website and EDGAR database is just one avenue through which financial documents are accessed; investors may use software such as the Bloomberg Terminal or FactSet to view filings, while others may navigate to a company's investor relations page instead of trying to navigate the comparatively confusing government site. Despite that, EDGAR is likely a better option for funds that employ robotic or automated programming, the researchers told CNBC.
"These findings represent usage through the SEC, so we can't observe whether you went through somewhere else," Crane told CNBC. But "the SEC is one of the easiest options if you're doing this with some sort of programming or Python script," allowing funds with high-level programming language to harvest — or "scrape" — massive amounts of data from the government website.
But just how the added public information benefits the funds remains in question.
For their part, the Rice researchers argued that while it's tempting to conclude that sophisticated hedge-fund managers are simply more skilled at processing swaths of information and data, their advantage may be more in their ability to match private data with public disclosures and SEC filings.
"We look at the people who do robotic downloading. The people who use it suggests that hedge funds are going out and that they're getting public information whenever they need," Umar told CNBC. "Hedge funds get satellite data, all sorts of hard-to-get information in addition to public filings, and it's difficult to tease out" the specific benefit from added SEC data.
Instead, Umar said, it's likely funds combine both public and specialized information while investing, using one to reinforce the other.