The first quarter closed on Tuesday, and many investors are glad to see it behind them. The Dow posted its worst first-quarter performance ever, while the S&P 500 and the Nasdaq composite both got close to that mark.

However, the major market indices jumped between 4.4% to nearly 7% over the last handful of days in the quarter. The positive momentum could be a reaction, in part, to the $2 trillion stimulus package passed by the U.S. government, but other, less obvious, reasons could be driving the move.

Stock market chart

Image source: Getty Images.

Institutions disclose their holdings

With the COVID-19 pandemic shutting the world down, businesses and economies hit the skids. Stock markets dropped precipitously. However, the end of the quarter brings new visibility to how the "smart money" responded to this crisis.

Any money manager with over $100 million in assets must report its stock holdings at the end of the quarter. These include mutual funds, pensions, hedge funds, banks, and other investment vehicles.

The fund manager submits a 13F-HR filing to the Securities and Exchange Commission (SEC) which details the number of shares of each company that it owns and the current value of those shares. The holdings reports must be filed within 45 days of the quarter's closing date. Thus, by mid-May, we will see what institutional investors owned on March 31.

One quick point to note is that the 13F-HR only includes long positions. Short sales, a bet the stock price will decrease, are not reflected. Hedge funds and other institutional investors use short selling both as an investment strategy and to mitigate risk across their portfolios.

Flock to safety

In the words of the legendary investor Warren Buffett, "Only when the tide goes out do you discover who's been swimming naked." Likewise, 13F-HR filings publicly reveal who owned the disastrously performing stocks. Do fund managers really want their investors to know that they held on to or bought airlines, hotels, financial services, or energy companies this past quarter?

In a play of Wall Street psychology, the companies perceived as safe and respectable often get a bump in stock price into the end of the quarter. Every investment manager wants to tout that they had the foresight to catch the meteoric rise of Zoom Video Communications (NASDAQ:ZM) or drug stocks like Gilead Sciences (NASDAQ:GILD) that are feverishly developing potential COVID-19 treatments.

Fund managers could potentially deter new investors if the portfolio looks too risky or it appears they were not proactive enough to cut losses early. A 20% loss may be acceptable, but losing 70%, the year-to-date drop at one point for Boeing (NYSE:BA), is viewed as reckless.

Beating the benchmark

Virtually every fund uses a benchmark index which it seeks to outperform. Whether it's retail investors in a mutual fund or limited partners (think pensions and endowments) in a hedge fund, the end of the quarter provides a natural time for investors to evaluate the fund's performance.

Hedge funds that charge high fees often have a feature to protect investors that's called a high watermark. This means the fund must recoup losses before the fund manager can get paid a success fee for delivering any gains. The fund manager could also face redemptions from the fund investors, requiring the fund to sell its positions to pay out that investor.

Besides the benchmark, these Wall Street investors are often fiercely competitive with their peers. The best performers will attract more money from pensions, endowments, and other investors. Therefore, it is in every institutional investor's interest to run up stocks it owns in a financial window dressing.

What now?

Short terms rallies over a few days should not affect buy-and-hold investors. Seeing a reprieve from a terrible-performing quarter may help psychologically. However, the only stock prices that matter are the day an investor buys shares and the day those shares are sold. An investment time horizon is important to keep in mind. Expect stock prices to dip at the start of the new quarter. However, for investors with available capital, solid companies now trade at bargain prices if you can endure the risk.