Average Buy Prices of Hedge Funds

What is an Average Buy Price?

Funds often buy stocks at different prices, building up their position over time. Bill Ackman once explained that often he'd buy a stock, then price would go down so he'd buy a lot more at a lower price.

The average buy price is an estimate of the cost per share for a fund. It takes into account all the fund's trades over time, including the different prices and quantities.

If the current price is above the fund's average buy price, then we expect the fund to be in profit, and vice versa.

How are Average Buy Prices calculated?

HedgeFollow calculates average buy prices differently from other websites. We believe our method provides better estimates, although that comes at a heavy cost.

First, we estimate the buy/sell prices of each quarter using a weighted average of the price during the quarter. Then we obtain all the buys/sells from a fund's filings, and calculate the rolling cost-basis of the fund's position by using the weight of each buy/sell during each quarter.

Finally, if data in the current quarter is available then it is also incorporated as:

• Weighted averages of trade prices reported on Form 4
• Weighted averages of reporting date prices on 13G/13D

The end result is an Average Buy Price that we believe is the best estimate of a fund's cost basis, based on available data.

The average buy price is actually one of the most computationally expensive operations, as the above process has to be calculated for millions of data points (per position per fund per date using all previous positions, and often requires readjusting).

Average Buy Prices are Estimates

No one knows the exact cost per share except the fund itself. The best anyone can come up with are estimates. And these estimates can sometimes be off for several reasons including:

• Fund's use of warrants, options, convertibles, etc
• Fund's use of purchase agreements, OTC deals, etc
• Reporting errors, propagated errors, etc

Thus one should not focus on the extreme outliers among Average Buy Prices, and instead look at the big picture and distribution.

Despite not being exact, Average Buy Prices do serve as quite good ballpark estimates in most practical cases, and investors like to compare their own buy prices to institutions, as it gives them a sense of where they stand.