Friday, June 5, 2009

Alphaclone MarketFolly Custom Portfolio Update: Q1 2009

Now that the first quarter 2009 13F filings have been filed with the SEC, Alphaclone (currently 50% off by the way) has gone through and rebalanced all of the clone portfolios. As such, we wanted to give everyone an update as to how our custom MarketFolly portfolio was performing. For those of you who are new to Alphaclone or to our portfolio, we would suggest checking out the following previous posts. We provided an in-depth overview of Alphaclone where we labeled it the ultimate hedge fund portfolio replication tool. Then, we first presented our MarketFolly portfolio here.

Just a few days ago, Alphaclone announced that they would be publishing portfolios by top bloggers. And, we are honored to say that they have published our portfolio. Thus, everyone who uses Alphaclone can now access our unique portfolio that is seeing 19.8% annualized returns since mid-2002. (Yes, you read that correctly... 19.8%). You can check out what positions our portfolio holds and can invest right alongside our portfolio and generate those returns for yourself. The MarketFolly portfolio is based on an assortment of hedge fund holdings and we've backtested the performance with Alphaclone's unique web-based software. Our custom portfolio is comprised of three stellar hedge funds: Seth Klarman's Baupost Group, Eric Mindich's Eton Park Capital, and Shumway Capital Partners (Chris Shumway).

Performance

As we've presented before in our in-depth presentation of our clone, we use a strategy that both generates Alpha to the tune of 17.7 and puts out a Sharpe Ratio of 0.7. Such a design has enabled us to see 19.8% annualized returns compared to only 2.3% annualized for the S&P500. Then, also consider that we have a 14% year to date return compared to S&P 4.4%. Lastly, let's look at the total return (this is where it gets good). Since mid-2002, our portfolio has seen a total return of 249.1% compared to a total return of only 17% for the S&P 500. The numbers speak for themselves. Check out the graph below from Alphaclone that shows all our backtested performance.

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As you can see from the graphic, you can also export everything as an Excel file for easy record-keeping. Oh, and we'd be remiss if we didn't also mention that if you enable a 50% portfolio hedge, the correlation of the portfolio to the indexes drops down to only 0.5. Even with the hedge, you're still generating Alpha to the tune of 16.0 and a Sharpe Ratio of 0.9. Definitely nice numbers for being protected and running a truly hedged book.

Our portfolio was just rebalanced to reflect that latest holdings from the 13F filings. Head over to Alphaclone to see what positions our portfolio is now investing in. Don't forget that Alphaclone is currently running a 50% discount, so take advantage of that while it lasts.


Hedge Fund Stock Picks: Ira Sohn Conference 2009

The following are stock picks and market comments from some prominent hedge fund managers from the recent 2009 Ira Sohn Conference as noted by Mike O'Rourke from BTIG. At last year's conference, David Einhorn was the only one whose recommendation came to fruition. His pick from last year? Short Lehman Brothers.

This is a summary of ideas expressed at the Ira W. Sohn Investment Research Conference today, Wednesday, May 27, 2009. The Ira Sohn Research Conference Foundation is dedicated to the treatment and cure of pediatric cancer and other childhood diseases.

NOTE: The notes below were taken in real time, but we apologize in advance for any transcription errors. THESE ARE THE OPINIONS OF THE SPEAKERS, BTIG DOES NOT AGREE OR DISAGREE WITH ANY OF THE STATEMENTS.

Peter Thiel, Clarium Capital
Thiel is taking a long term time horizon and contrarian perspective as to whether this is a financial crisis at all. He asserted that productivity growth is the key to increasing the standard of living. Thiel explained that there are 3 ways to create productivity: Additional Leverage, Globilization and Science & Technology. We are witnessing the results of the Additional Leverage. Thiel believes the virtuous effects of Globalization are behind us. Instead of the disinflationary influence it has had over the past two to three decades, inflationary forces will take hold as nations compete for resources. In the area of Science and Technology, Thiel believes that things are not healthy in the ever expanding universe of human knowledge. Major research is turning out to be fraud and there is actually less progress than there appears to be in science. Technology, the application of science and also has not made much progress. Examples include the venture capital community, which has not made money in 10 years, there is no money being made in IPOs and the poor conditions of the State of California.

Thiel believes this is not a new problem and this has been going on for a very long time. 1969 may be the year that progress died. Innovation has been barely enough to keep up with global constraints. Thiel referred to the Tech boom of the late 1990s as a fraud. He questioned how you get high returns in a world with such little innovation. You get the high returns through high leverage. High leverage is a symptom and cause of failed innovation of the past 40 years.

Thiel believes there will be no V shaped recovery until the productivity issue fixed. He also noted that he believes the U.S. Government is nowhere near being on the right track. And he would fade the recovery trade, we will see inflation in assets we need (commodities) and deflation in assets we own. He believes the U.S. is radically misdiagnosing the problem. Washington is dominated by lawyers and economists and not the scientists that are necessary to correct the problem. Thiel referred to the situation as the myth of technological progress and asserted that most innovation we have received is hype. He discussed large cap tech names in a pejorative manor stating that betting on established Technology companies like Cisco, Microsoft and Intel is a bet on no innovation. He thinks we should be looking for companies that are truly innovating, of which there are only a handful.

Joseph Healey, HealthCor
Healey outlined the great demographics behind the Health Care industry while analogizing the current Health Care reform movement to the Hillary Care movement of the early 1990’s. Healey noted that Health Care is projected to become 20% of GDP by 2018. Advances in Health Care have increased life expectancy from 47 years in 1900 to 78 years today. Uncertainty about the Administration’s push for Health Care reform is creating an overhang in the group, similar to Hillary Care overhang in the early 1990’s. From the time Clinton took office to the time Hillary Care was quashed in 1994, Health Care underperformed the market and when Hillary Care was quashed, Health Care drastically outperformed. Once reform begins to take shape and there is clarity to the situation the stocks will improve. He believes the overhang created by this uncertainty creates a good investment opportunity.

Healey discussed 3 companies that he believes have significant upside potential. First, he discussed Valeant Pharmaceuticals (VRX). The cornerstone for Healey’s thesis was the potential for its epilepsy drug, retigabine. Glaxo has partnered with Valeant on the drug. Wall Street has significantly underestimated the upside potential for the drug. Healey noted it is his belief that if Glaxo does not acquire or take over the company, then the stock has potential to rise to the $40 to $50 range. The second stock Healey discussed was Hologix (HOLX), which he believes has potential to double from current levels. He described it as one of the most compelling new product stories in the MedTech group. The business is 70% consumables with a razor-razor blade model and has a Free Cash Flow yield of 10%. Healey’s final idea was Life Technologies (LIFE), where he noted the 8% Free Cash flow yield and upside potential of 60% from current levels.

Mark Kingdon, Kingdon Capital Management
Mark Kingdon opened up with a slide on Bank of America titled “An extraordinary opportunity?” Kingdon noted that Bank of America (BAC) is trading 5x normalized earnings. He discussed the severity of the Government’s SCAP (Stress Test), which he noted was rigorous. Kingdon noted his firm’s analysis arrives at a Tangible Book Value of $11 per share for BofA. Kingdon noted the franchise businesses of BofA and its position as the largest Commercial and Retail bank. Kingdon arrives at Normalized Earnings per share is $2.24 using inputs of 1.2% for the loan loss provision and net interest margin of 2.75%. The loan loss provision is quite high based upon net charge offs over the past 20 years, with the exception of a short period of time around the S&L crisis and the current environment. Kingdon believes the net interest margin of 2.75% is conservative and should expand since the Fed has created a steep yield curve and there is less completion in banking industry. His firm’s analysis leads Kingdon to believe that BofA has potential to rise above $20 in a year.

Stephen Mandel, Lone Pine Capital
Mandel started by noting the two components he looks for when seeking a margin of safety: price paid and strength of business franchise. If given a choice of one or the other, Mandel’s preference is strength of the business. In the current market, great franchises have been stagnating while cyclical rally is occurring. Mandel believes that Strayer Education (STRA) is one of those companies with a superior franchise. There is a huge, underserved demand for working adult secondary education and traditional universities not set up to serve these customers. Strayer’s graduation rate is above community colleges and its student loan default rate is low. The Company has partnerships with corporations to educate employees. Strayer’s operating margins are in the mid-30% range. The company needs little capital to operate and grow its business. In 2008, only 20% of $100 million in cash flow was necessary to grow business and the balance was returned to shareholders through various means. Mandel believes sales and profits should grow 8x over the next 10 years. Currently, the company is trading 25x this year’s earnings and 20x next year’s earnings. Those multiples should contract quickly as the company grows. The $2.5 billion market should be much larger by the time STRA is a fully national company.

Jim Chanos, Kynikos Associates
Chanos’ presentation was titled “For profit social services from the trough to the slaughter house.” Following the 30 year deregulation boom in Health Care, Education, Financial Services, Defense and Government Services, the Government will be looking for payback. Health Care faces significant reform. Education is becoming a right and not a privilege and that will cut into margins. Investors find themselves questioning the very foundations of society. The Administration believes Health Care and Education are civil rights and part of its legacy. Chanos refers to the groups at risk of seeing their profit margins cut by Government reform as Capital Offenders.

Chanos highlighted For Profit Education where federal funding represents 73% of revenues at the top 4 companies. The margins for the group are 27% much higher than the 12.5% of the S&P 500. Instructional costs as % of revenues declining, not reinvesting in educating the students. Government funding has fueled double digit student growth. Students at these proprietary schools are saddled with more than 58% than students at traditional school. The companies valuations leave no margin for error.

Chanos also highlighted the challenges to Health Care. Margins in the group are approximately 50% greater than that of the S&P 500. Big pharma spends 3x more on advertising than they do on R&D.

Currently Health Care represents 16%-17% of GDP that is 2x that of the rest of world with worse outcomes. There are 45 million Americans without health insurance the administration’s attempts to insure these individuals will cut into margins. Health Care gross margins range from 30%-70% and operating margins are 50% better than the S&P 500. Government will look to take these actions to contract margins. Chanos is shorting Lincare (LNCR) where margins are still among the highest in the industry. He believes it will be poster child for what is about to happen to the Health Care industry.

Peter Schiff, Euro Pacific Capital
The U.S. Government is interfering with the free market forces trying to fix the economy. We lived in a phony “bubble” economy. The Government is trying to reflate the bubble. Americans are trying to rebuild their balance sheets and save to build wealth. As any drug addict knows if you stop using drugs you will go through withdrawal. Government is making the situation worse. We don’t need any more stimulus, we are suffering from the stimulus we have already been given. Alan Greenspan and Federal Reserve got everyone drunk on easy credit. Government has created moral hazard, i.e. Fannie and Freddie. The housing bubble was Fed and nurtured by the government. America is broke and our creditors are acknowledging that.

What is going on in the global economy will not last and is beneficial to the rest of the world. Foreign nations will retool factories and create products for themselves. Our ride on the global gravy train has come to the end. The whole service sector economy has to go away. If companies are not profitable they need to go out of business. Nobody talks about the productive jobs the Government destroys by saving jobs at GM or AIG. The damage this time around can be far greater than Hoover and Roosevelt created during the Depression. Hoover attempted to bail out the economy and business, Roosevelt only followed his failed policies on a much larger scale. Bush has followed bailout policies like Hoover, now Obama’s is following Bush’s failed policies only on a much larger scale.

Japan was in a good position when they busted, we are in the opposite position. We can’t solve a crisis that is the made of borrowing and spending by more borrowing and spending. Our creditors will stop lending to us. Inflation is going to run out of control. Ultimately that inflation is going to cause prices to go through the roof. We will not be able to purchase items to go on store shelves. This not a major collapse, it is a restructuring. The decoupling concept is here, but the US is not the engine it is the caboose.

You need to own assets in countries where economies will thrive and prosper like Asia, and stay away from US assets. This is the beginning of an inflationary depression.

Lee Hobson, Highside Capital Management
Lee Hobson of Highside Capital presented two straight forward investment ideas, one long and one short. Hobson cited the opportunity in emerging markets where low (wireless) telecom penetration = high growth potential. Hobson noted countries who introduced wireless technology later have faster growth curves and adoption rates thanks to cheaper technology. Hobson like Millicom International (MICC) to play this trend. Cellular service in emerging markets proven trend that offers affordability and high utility to the consumer. He equates it Coca cola 50 years ago. Building a strong internationally recognized brand among consumers who crave the product. MICC sells their service internationally under the Tigo brand. The product is accessible, affordable , available (strong networks) and serves the consumers need to communicate. Millicom has a 25 year emerging market history. They serve growing less developed countries with a total of 290 million people. Wireless penetration ranges from 10% to 80% in their markets –in developed markets penetration is above 100% (multiple phones). The company trades 3.6x forward EBITDA and is growing cash flows at 20%. The companies growth can be self funded an it can grow secularly for a long time with consistency.

Hobson suggested betting against auctioneer Ritchie Bros. The company is an auctioneer of used industrial equipment. It earns a 10% commission rate on what the auction price. To grow earnings they need to grow revenues. The company is trading 29x earnings and 16x EBITDA. Earnings growth accelerated over the past 5yrs transitioning from single digits before to high teens. Company has a 15% market share and company claims it will grow through market share gains.

Hobson states the real growth driver for the company has been equipment price inflation (as a result of the building boom). The company also did a significant amount of capital intensive site builds, but their “same store sales” only grew at a rate of 2%. The volume trends of the business are not likely to be countercyclical as the company suggests. Company had to spend 90% of cash flow to grow revenues but in both the slow and fast growth environments their capacity increase CAGR was 6%. Commercial Construction lags the economy, non residential orders and are backlog collapsing. Management is selling stock and made sales as recently as last week. EPS likely peaked in 2008

Paul Singer, Elliott Associates
Investor have become accustomed to the post war solid growth model. It is likely the solid growth, stable inflation model is gone. There will be a period of deleveraging in an environment of high inflation with areas of deflation. Certain elements of current environment concern Singer. Singer discussed regulation and fears this era of anti capitalistic behavior. He expects a global scheme on the limitations of leverage. Hedge funds did not blow up the world, regulated entities did. Singer is concerned about the treatment of investors in the secondary market for debt. He fears restrictions on the ability for investors to exercise their rights will prevent the flow of capital to markets.

Singer discussed the rule of law. He noted it is devilishly hard to preserve private capital for a long time. Rule of law is a necessary but not sufficient condition. The color of money can change over time. Capital will flow to where it is treated best. Arbitrary actions that circumvent the law for the purpose of achieving a short term government objective will have long term consequences. Rule of law needs to win over the rule of enlightened elite. The government is elephant in the room- hope it the government cares what the room looks like after it is done stomping around the room. It is important to get through this challenging time with our time tested principles intact.

Bill Ackman, Pershing Square Capital Management
Bill Ackman laid out an in depth case as to why the equity shares of General Growth Properties (GGWPQ) are a good investment despite being in bankruptcy. It all breaks down to the company’s assets are greater than their liabilities. Through several potential workout agreements or a court appointed “cram down” the equity should greatly benefit from the likely scenarios. As far as a business General Growth’s malls have over the country 24,000 tenants. The company has 73 “Class A” malls, and high profile names like Faneuil Hall and South Street Seaport do not even garner that high rating. At General Growth 50 of the 200 malls create 50% NOI. Malls historically generate high stable cash flows. General Growth has fixed rates on 83% of debt. This is a business where inflation is an asset. In losing Circuit City the company lost a tenant paying below market rents. The company’s problems result of the CMBS market collapsing. The credit market shutdown prevented them from rolling their debt. They have the second highest occupancy of any mall company. The NOI is actually from the levels where the company’s market capitalization peaked.

Ackman made the analogy between General Growth and the situations that occurred at Alexanders and Amerco (U-Haul). These were bankruptcies where assets are greater than liabilities. During bankruptcy a creditor entitled to their claim but no more, and in this case the equity will be left with value. Ackman suggests two potential options- either an extension of current debt 7 years or a debt for equity swap. He notes either scenario would create approximately a per share value emerging from bankruptcy $20 go to $35. Another option would be if the bankruptcy court forced a “cram down.” In this event Ackman exhibited precedents where the company’s interest rates would be lowered creating a better scenario for the company. Ackman notes the likelihood of forced liquidation by the court is minimized because of the extreme pressure it will place on the commercial real estate market and other REIT’s.

David Sokol, MidAmerican Holdings Company (Berkshire Hathaway)
Sokol is not seeing the green sprouts -- but that is not surprising to them. Government intervention can draw this out longer than necessary, but is useful in some circumstances. Unemployment will rise north of 10%. They are not seeing much improvement in housing. 92% of loans they have seen this year are all conforming. Although there are in excess of 1 million household formations per year, Sokol believes the backlog of 10-12 months is actually 2x that amount of yet-to-be-foreclosed homes. Sokol expects it to be mid-2011 before a balanced home sales environment emerges (6 months of inventory).

In regulated energy the headwinds are greater than any time in his 30-year experience. Inflation and rising borrowing costs are challenging headwinds. The utility industry can handle carbon emissions restrictions, but the cap & trade legislation as currently written will drive up energy prices for consumers to levels that will be hard to digest.

David Einhorn, Greenlight Capital
The theme of David Einhorn’s presentation was the curse of the AAA. Obama administration is following the same policies of the Bush Administration. The administration is reflating the economy back to 2006 levels. For the economy to recover underwater entities need to restructure their debt. The willingness for banks to negotiate in this environment depends upon where the positions are marked. The Obama loan modifications lack the most important aspect of restructuring –debt reduction. The debate in the banks was too narrow with only two options discussed - Nationalizing versus Taxpayer Bailout. There is a 3rd option, debt or preferred equity conversion to common equity. Attempt to induce debt of equity conversions without creating a downdraft in the group. Banks are not materially more solvent today than they were two months ago. Regulatory forbearance has created this rally in banks. We should be overcapitalizing the banks and direct them to restructure the debt of their borrowers. The Government spending and guarantees put the U.S. AAA credit rating at risk. US debt need s to be managed responsibly.

Einhorn took to task Chairman Bernanke’s assertion that AIG failed because there was a hedge fund at the top of an insurance company. AIG failed because it was not a hedge fund, but a AAA rated highly rated regulated insurance company. This status gave false security to investors and counterparties. Hence the curse of the AAA, most of the institutions that ran into major trouble were AAA rated entities. Fannie, Freddie, AIG, monolines, GE all were AAA rated. Einhorn says he is betting against Moody’s (MCO). He describes the situation as such if your highest rating is a curse of those who have it what value do you have? If your goal is to destroy the brand would you do anything differently than Moody’s has done. Why reform them if we can get rid of them? Ratings system is inherently pro-cyclical and destabilizing. Regulators can improve the stability of the financial system by eliminating the ratings agencies. Company is 19x estimated earnings, balance sheet is upside down with negative shareholder equity.

Einhorn and his colleagues at Greenlight announced they were donating $7 Million of their profits from the Allied Capital short to charity.

Comparing the presenters from last year to this year, we see that only Bill Ackman of Pershing Square and David Einhorn of Greenlight Capital are repeat presenters. But, as you can tell from above, there was still a lengthy list of insightful market commentary and stock picks to dig through.

We think the most interesting thing to highlight from the conference was the fact that there was a disagreement amongst two well known players. Stephan Mandel of Lone Pine Capital was bullish on Strayer Education (STRA). Conversely, noted short-seller Jim Chanos of Kynikos basically said to short the 'for-profit' education plays. There are always two sides to a trade and their difference of opinion definitely showcases this. It will be very interesting to see who comes out on top once 2010 rolls around. We should also note that numerous other 'Tiger Cub' hedge fund managers agree with Mandel and have followed suit by buying shares in Apollo Group (APOL) and Strayer. Andreas Halvorsen's Viking Global has a large APOL stake as we noted in our hedge fund portfolio tracking series.

After winning handsomely on his recommendation to short Lehman Brothers at last year's Ira Sohn Conference, David Einhorn of Greenlight Capital was back with another short recommendation. This time around, he is bearish on Moody's (MCO). We'll have to see if he can hit back to back home runs on the short-side with his conference suggestions. We recently covered Einhorn's portfolio here.

Bill Ackman's position in General Growth Properties (GGWPQ) is no secret. He has been in the name for some amount of time now and we have detailed his thoughts on the position previously. Additionally, we have posted up his presentation on GGWPQ from the conference in its entirety. We'll have to see if he has better luck with this position than he has had with his quest to institute real change at Target (TGT). He just recently lost a proxy contest with that one.

Lastly, we want to focus on global macro man Peter Thiel of Clarium Capital. We've followed Clarium on the blog for a while now and have seen them net short US equities and net long foreign debt. Thiel is focused on fading the 'recovery' in the markets and putting on plays that will benefit from commodity inflation. Yet, at the same time, he sees deflation of 'owned assets.' You can read more of Clarium's thoughts in two of their recent investor letters. The first details market commentary and the second details a macro framework for equity valuation.

Overall a great selection of ideas to sift through from this year's conference. Hopefully though, the picks from this year's participants will fare better than last years. FirstAdopter has broken down the performance of last year's picks in a nice chart:

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And, as you can see, only Einhorn found any success. But, with a pretty much new slate of presenters this time around, we have hope for better results. We do know one thing though, we'll certainly at least match last year's record with at least one victor. After all, Mandel and Chanos are pitted against one another on opposite sides of the 'for profit eduction' play.


Guest Post: Barel Karsan

The following is a guest post by Saj Karsan, who regularly writes for Barel Karsan, a site dedicated to understanding the principles of value investing, and applying these principles to finding and discussing current value investments.

Over time, value investors far outperform the market. In a terrific article by Warren Buffett, he outlines why this outperformance is not likely to be due to chance or luck. Many of the fund managers that we read about here on Market Folly are value investors, and this site does a great service in letting us know what these managers are buying and selling. At Barel Karsan, we focus on why a manager is buying or selling, so that we can apply these principles to other stocks in the market.

For example, consider Seth Klarman, whose stellar returns over the last few decades have made him a fortune. By understanding how he makes his purchase decisions, we put ourselves in a position to improve on our own abilities as investors. We do this by summarizing the key points from his book, (as well as the key points from the books of other successful value investors) and by applying these principles to current investment opportunities.

Can these principles be learned and applied? Absolutely. We have a list of several recent examples (even over the last few years, during a period in which the market was sizzling!) demonstrating how certain stocks were undervalued, and how value was eventually recognized, with excess returns accruing to the astute investor who spotted the original mispricing.

If the subject matter of this article interests you, consider subscribing to the RSS feed at Barel Karsan.


What We're Reading 6/5/09

To present the counterside of the argument: Downside to piggyback investing [New Rules of Investing]

The bull & bear case for gold [Humble Student of the Markets]

Being right is overrated [Abnormal Returns]

Alphaclone video presentation [Finovate]

Why Ackman Failed Versus Target [Breakout Performance - Ironfire Capital]

Bill Ackman's lengthy response to the New York Times (re: Target) [Dealbook]

Bill Gross' Investment Outlook - June 2009 [PIMCO]

It's Finished [London Review of Books] - hat tip to reader Peter


Thursday, June 4, 2009

Lee Ainslie's Maverick Capital Sells CVS Caremark (CVS) In Favor Of Walgreens (WAG): 13F Filing Q1 2009

This is the 1st Quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the Hedge Fund 13F filings series preface.

Next up, we have Maverick Capital. Lee Ainslie started Maverick Capital back in 1993 with $38 million. Nowadays, the fund is worth over $5 billion. Ainslie, like many of the other fund managers we've profiled, has a background rooted in learning from legendary great Julian Robertson at Tiger Management. Just yesterday we ran a profile on Robertson and took a deeper look at his current big investment. These proteges (nicknamed 'Tiger Cubs') learned from the best and have had great success running their own funds. Some of the other Tiger Cubs include Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, and Andreas Halvorsen's Viking Global.

Maverick's strategy is straight up stock picking, both long and short. While they focus on both the long and short sides of the book, they do not employ pairs trades. Maverick places a large emphasis on a team atmosphere and focuses on risk management. Instead of having one or two people making all the investment decisions, Maverick has six industry sector heads. The industry heads of the consumer, health care, cyclical, retail, financial, and technology sectors all report to Ainslie. While Ainslie still has the ultimate say, he considers them peers and values the team culture at Maverick. In an interview in the past, Ainslie has said "I spend the majority of my day talking to them because they know so much more about each of their stocks than I could ever hope to. We're all peers." Each team typically has around 7 analysts.

They are a long/short hedge fund in the true sense of the definition. Maverick uses a value approach (obviously learned from Julian) and one of their most popular metrics is finding companies and comparing their enterprise value to sustainable free cash flow. 2008 was a rough year for them (and many other funds) as their Maverick Fund finished -26.2% for the year, as noted in our year-end hedge fund performance numbers post. Some of their notable past activity includes selling out of their entire Under Armour (UA) position via a 13G filing, as well as filing a 13G on Cardiovascular Systems (CSII).

For more background on Ainslie and Maverick, check out the profile/biography on them that we posted this morning.

The following were Maverick's long equity, note, and options holdings as of March 31st, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.


Some New Positions (Brand new positions that they initiated in the last quarter):
Walgreens (WAG)
Best Buy (BBY)
KLA-Tencor (KLAC)
Progressive (PGR)
Wellpoint (WLP)
Strayer Education (STRA)
Mastercard (MA)
Sears Holdings (SHLD)
Pepsico (PEP)
Davita (DVA)
Visa (V)
AmerisourceBergen (ABC)
PNC Financial Services (PNC)
Advanced Micro Devices (AMD) Bonds
Parker Hannifin (PH)
Green Mountain Coffee Roasters (GMCR)
Liberty Media (LCAPA)
Electronic Arts (ERTS)
Time Warner Cable (TWC)
Orthofix International (OFIX)
OptionsXpress (OXPS)
Air Methods (AIRM)
Bankrate (RATE)
Time Warner (TWX)


Some Increased Positions (A few positions they already owned but added shares to)
Netapp (NTAP): Increased by 190%
First Solar (FSLR): Increased by 90%
Lorillard (LO): Increased by 80%
HanesBrands (HBI): Increased by 61%
Cognizant Tech (CTSH): Increased by 57%
Resarch in Motion (RIMM): Increased by 40%
RenaissanceRe (RNR): Increased by 35%
Wyeth (WYE): Increased by 30%


Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)
Priceline (PCLN): Reduced by 37%
Fidelity National (FIS): Reduced by 29%
Pfizer (PFE): Reduced by 27%
JPMorgan Chase (JPM): Reduced by 25%
Gilead Sciences (GILD): Reduced by 24%
Lender Processing (LPS): Reduced by 20%
Qualcomm (QCOM): Reduced by 20%


Removed Positions (Positions they sold out of completely)
CVS Caremark (CVS)
Staples (SPLS)
Baxter (BAX)
Carnival (CCL)
Covidien (COV)
Devry (DV)
Macys (M)
Genentech (DNA)
Dicks Sporting Goods (DKS)
State Street (STT)
Textron (TXT)
Health Net (HNT)
Interval Leisure (IILG)
Universal American (UAM)


Top 15 Holdings (by % of portfolio)

  1. Walgreens (WAG): 4.33% of portfolio
  2. Lorillard (LO): 3.63% of portfolio
  3. Apple (AAPL): 3.34% of portfolio
  4. Research in Motion (RIMM): 3.28% of portfolio
  5. First Solar (FSLR): 3.26% of portfolio
  6. Raytheon (RTN): 3.1% of portfolio
  7. Wyeth (WYE): 3.08% of portfolio
  8. Cognizant Technology (CTSH): 3.06% of portfolio
  9. Qualcomm (QCOM): 2.93% of portfolio
  10. Liberty Media (LMDIA): 2.83% of portfolio
  11. Best Buy (BBY): 2.73% of portfolio
  12. Amgen (AMGN): 2.7% of portfolio
  13. Marvell Technology (MRVL): 2.59% of portfolio
  14. Apollo Group (APOL): 2.56% of portfolio
  15. Netapp (NTAP): 2.19% of portfolio

Maverick started a brand new position in Walgreen's (WAG) and brought it all the way up to their top holding. Additionally, they sold completely out of their CVS Caremark (CVS) position (which had previously been their #1 holding the quarter prior). So, it looks like they've straight up swapped CVS in favor of WAG. That is by far and away their biggest move of the last quarter. Their brand new addition of Best Buy (BBY) was noted as well.

Regarding positions they already owned, Maverick significantly bumped up two of their holdings. They added significantly to their Lorillard (LO) and First Solar (FSLR) plays, as those two stand as their 2nd and 5th largest positions respectively. We also noticed their large purchase of Netapp (NTAP) shares, but even after the purchases, that position is still only their 15th largest holding.

Maverick's portfolio also definitely showcases their 'Tiger Cub' roots. They hold numerous Tiger favorite names such as Apollo Group, Wyeth, Apple, Lorillard, and Strayer Education. What's interesting when you track the Tiger Cubs is the slight divergences you begin to see amongst managers. While all of them are rooted in the same principles of investing they employed in their time at Tiger, they have all added their own twist and personal touch to the strategy. As such, you now see Maverick still holding Lorillard (LO) as their 2nd largest position. While, on the other hand, we recently saw Lone Pine completely sell out of their LO position. Conversely, a while ago John Griffin's Blue Ridge Capital had sold out completely out of Tiger Cub favorite name America Movil (AMX) when Lone Pine continued to add to their position. These divergences between the Tiger Cubs have become very intriguing to us and it almost becomes 'who do you want to follow now?' when they split opinions. In the end, it appears that Maverick still has conviction behind their LO play.

Assets from the collective holdings reported to the SEC via 13F filing were $5.5 billion this quarter compared to $4.8 billion last quarter. So, they definitely put some money to work on the long side of the portfolio over the first quarter of 2009. Maverick is just one of the 40+ prominent funds that we'll be covering in our hedge fund Q1 2009 portfolio series. Check back each day as we cover new fund portfolios. We've already covered Andreas Halvorsen's Viking Global, John Paulson's hedge fund Paulson & Co, Stephen Mandel's Lone Pine Capital, Eric Mindich's Eton Park Capital, John Griffin's Blue Ridge Capital, and David Einhorn's Greenlight Capital, Seth Klarman's Baupost Group, and Timothy Barakett's Atticus Capital.


Profile/Biography on Lee Ainslie & Hedge Fund Maverick Capital



Continuing our series of hedge fund profiles and biographies, we turn our attention now to Lee Ainslie of Maverick Capital. We thought this transition was appropriate given how we just yesterday initiated our profile series with coverage of hedge fund legend Julian Robertson of Tiger Management. (We also covered Robertson's big inflation bet as well). We turn to Lee Ainslie of Maverick Capital now because Ainslie formerly worked under Julian at Tiger. As such, he is a 'Tiger Cub' and employs much of the investment methodologies he learned while at Tiger as their technology analyst.

Ainslie graduated from the University of Virginia and then received his MBA from the University of North Carolina. He founded Maverick Capital at age 29 in 1993 with $38 million in seed capital from Texas entrepreneur Sam Wyly. Maverick has offices both in Dallas and New York and now managers well over $5 billion. They are a long/short equity hedge fund in the 'old school' sense of the word. The truly are a hedged fund as they focus on equities on both the long and the short side. In an interview with McKinsey, Ainslie has said that, "Our goal is to know more about every one of the companies in which we invest than any noninsider does. On average, we hold fewer than five positions per investment professional - a ratio that is far lower than most hedge funds." They focus on exhaustive research and that is their edge. This methodology carries over from his days at Tiger Management, who was also known for their extensive research.

Ainslie learned one thing in particular from Robertson which he still does to this day. When he reviews his gameplan and stocks, he tests his conviction by gauging whether the name is a buy or a sell; there is no hold. Ainslie says, "Either this security deserves incremental capital at the current price point or it doesn't - in which case, let's sell it and put the money to work in a security that deserves that incremental capital."

Maverick's strategy is straight up stock picking, both long and short. While they focus on both sides of the book, we've been told before that they do not deploy pairs trades. One thing Maverick does use, however, is multiple variants of risk management. Ainslie likes to manage risk appropriately by keeping positions tight and under control. Typically, he likes to keep each position top out at around 5-8% of the overall portfolio. This discretion allows for solid position diversification and risk mitigation. Additionally, instead of having one or two people making all the investment decisions, Maverick has six industry sector heads. The industry heads of the consumer, health care, cyclical, retail, financial, and technology sectors all report to Ainslie. While Ainslie still has the ultimate say, he considers them peers and values the team culture at Maverick. In an interview in the past, Ainslie has said "I spend the majority of my day talking to them because they know so much more about each of their stocks than I could ever hope to. We're all peers."

Each sector head typically has around 7 analysts and so there is a real team atmosphere both on a micro a firm-wide level. Ainslie serves as a centerpoint amongst the teams, as his job is to weigh the input from the heads and allocate the right amount of capital to the best ideas. It's key to also point out the impact Steve Galbraith has at Maverick. Galbraith joined Maverick after leaving his post as chief equity strategist for Morgan Stanley. He plays just as an important role in the investment plan as Ainslie because he offers what Ainslie says he himself lacks: a more macro perspective. They don't use price targets and instead adapt as the world around them changes, constantly re-evaluating their investments. Historically, Maverick has run 25-75% net long, with it typically falling around the 49% range. Additional figures show that in the past they've allocated 140-145% of capital to stocks expected to rise, while allocating around 100% of capital to their shorts.

As such, they employ some leverage, typically landing their gross exposure at around 200-250%. Ainslie makes the case for using this slight amount of leverage as a tool to run a more balanced portfolio. Without leverage, a 75% long and 25% short portfolio gives you a ratio of longs:shorts of 3:1. But, when employing a slight amount of leverage, he can run his book 150% long and 100% short. That leaves his ratio of longs:shorts at a more risk-friendly 1.5:1.

What is interesting about their short positions is that they don't short things simply as a hedge. They don't usually use index hedges and instead focus on individual stocks/companies. They harp on risk management by allocating their plays equally by both industry and world region. Maverick is a long/short equity fund and pick stocks, that's all there is to it. This is one of the main reasons we track them (& the other Tiger Cubs) in our hedge fund portfolio tracking series. By following funds that use a fundamental bent and focus on stockpicking, we can be assured that they typically have a longer investment timeframe. They are investing in their portfolio companies rather than trading rapidly in and out of them. We're covering Maverick's holdings today, but we've already covered some of Ainslie's fellow Tiger Cubs including Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, and Andreas Halvorsen's Viking Global. All of those funds have solid track records and are good to track due to their investing methodologies.

Getting back to Maverick, it is also prudent to point out that they focus a lot on both valuation and management teams. Ainslie points out that, "We have made the mistake more than once of not investing in a company with a great management team because of valuation concerns - only to look back a year later and realize we missed an opportunity because the management team made intelligent, strategic decisions that had a significant impact." Maverick typically looks for a one to three year holding period for their investments and seeks companies that will out or under-perform by a wide margin on an annualized basis. Additionally, they don't like to evaluate the success of a company by whether or not they beat the market's expectations on quarterly earnings. However, they do dissect the numbers and like to compare their own expectations with the reality of the company's performance.

When talking about Maverick's opportunity set, Ainslie has said that, "At Maverick, we define our investment universe as all stocks that have an average daily volume greater than $10 million - there are roughly 2,500 such stocks around the world. Since we may hold long or short positions in any of these stocks, we have about 5,000 different investment opportunities." It is clear that Maverick ultimately wants to be invested in liquid companies, as they have previously stated that they could liquidate more than 70% of their portfolio within a week's time. This is prudent to note when you consider numerous funds in the financial crisis had problems with illiquid positions.

As of the end of 2008 they had six main funds that we're aware of: Maverick Fund, Maverick Levered, Maverick Neutral, Maverick Neutral Levered, Maverick Long, and Maverick Long Enhanced. The additional funds contain the same positions as their main fund, but they contain different quantities based on the strategy and fund structure. Maverick uses a value approach (obviously learned from Julian) and one of their most popular metrics is comparing companies' enterprise value to their sustainable free cash flow.

They are an ideal fund for any aspiring stock picker to follow and hopefully you now see why. Check out Maverick's investments and recent portfolio changes to get a better idea as to what they're up to these days. Also, make sure you read the other posts in our Market Folly hedge fund Profile/Biography Series: Julian Robertson (Tiger Management). Stay tuned, as we'll be adding new funds to the series periodically.


Sources: Investor Letters, Various Interviews, HedgeHunters, & McKinsey


John Paulson's Hedge Fund Paulson & Co Covers Barclays (BCS) Short

Boy, how we wish there were public short disclosures in the United States. But alas, even if it would be intriguing content for the blog, we feel it would not be good for the markets. The UK has slightly different feelings as they have required disclosures regarding short positions in financials. And, purely from a blogging perspective, we welcome the news.

Straight to it: John Paulson's hedge fund Paulson & Co has essentially covered their short of Barclays (BCS). Previously, Paulson had a short position of 1.7% shares of the bank and their disclosure yesterday shows them as now having less than a 0.25% short stake. While they still hold the position, it is miniscule compared to what it once was. Marketwatch says that Paulson could have taken a $165 million loss on the position as shares have rocketed higher over the past few months. This news of course comes on the heels that Abu Dhabi's International Petroleum Investment Company was selling over 1 billion shares of BCS.

Back in February, we had noted Paulson's profits from shorting Lloyds, another UK financial. These profits came from short positions that were first revealed back in September of 2008. At that time, we learned that hedge funds Paulson & Co and John Griffin's Blue Ridge Capital had large short positions in numerous UK financials. Blue Ridge was short companies such as Alliance & Leicester and Anglo Irish Bank. Paulson, on the other hand, was short Barclays (BCS), Royal Bank of Scotland (RBS), and Lloyds (LYG). We're not quite sure who still hold what short (if at all), as we're still working our way around the UK disclosures. What we do know for sure though, is that Paulson has covered the vast majority of their Barclays short, as referenced above.

We can now add this update to the flurries of portfolio adjustments we've noted Paulson making. Most notably, he now has a large gold position (via GLD) and also has large stakes in numerous gold miners. Just 2 days ago, he filed a 13G on miner AngloGold Ashanti (AU). In another asset class, Paulson has also started a real estate recovery fund, targeting distressed assets with a multi-year investment timeframe. He's been busy to say the least.

Recently, Paulson graced Forbes' billionaire list, but that one is almost a no-brainer. After all, he did garner returns of 590% and 353% in two of his hedge funds. More notably, he was among the top 25 highest paid hedge fund managers of 2008. While Paulson's past bets have landed him great success, it seems he has taken a loss on his financial short for now. Time will tell if he will put the short back out. Considering his cautious stance on the economy near-term, we'd be inclined to think that he is merely cutting his stake while the 'bear market rally' continues to march onwards and upwards with intentions of reallocating once the euphoria dies down. (Do note that is pure speculation on our part). Check out our post on Paulson's portfolio and background for more information on America's favorite fund manager. (Also be sure to check out their year end letter & report).


Wednesday, June 3, 2009

Alphaclone Announces Investable Portfolios & Fund Groups By Bloggers

There were two exciting developments yesterday out of our favorite hedge fund cloning software, Alphaclone. They've announced that you can now invest in the popular clones they've created through a partnership with Folio Investing. Additionally, they've also started publishing fund groups created by bloggers (including yours truly).

Firstly, we'll start with the news that is slightly more exciting to us on a personal level. Alphaclone has published two new fund groups. We are more than proud to announce that the Market Folly Fund Group is now live on Alphaclone. This fund group is of course the portfolio clone we created a few months back using their web-based software. The portfolio has been a huge success as it is up 15% year to date and has seen 20% annualized returns. The numbers really are astounding.

Additionally, Mebane Faber's World Beta fund group has also gone live. Meb's group tracks the top 10 holdings of ten of his favorite hedge fund managers and has put up equally astounding performance numbers. Mebane of course if the author of the well-known World Beta blog and the author of The Ivy Portfolio, his book about Endowment Investing which we recently reviewed. Needless to say, this is a very exciting development and we're happy to contribute to such great hedge fund tracking software. Stay tuned because there will also be other blogger fund groups released in the future.

Secondly, we wanted to touch on Alphaclone's other big announcement: they've launched investable clones in partnership with Folio Investing. Taken from the Alphaclone blog, this unique approach now "allows investors to buy an entire portfolio of securities at once with one transaction, and have any dollar amount automatically distributed at the proper percentage weights across all of the stocks in the portfolio." They've released investable clones based on Warren Buffett's Berkshire Hathaway and the 'Tiger Cub Portfolio,' which we've previously covered here on the blog as well. In addition to the clones they've just released, you can also customize your own clones to invest in with the help of Folio Investing. These are some exciting developments at Alphaclone and we can't wait to see what they come up with next.

Remember, Alphaclone is currently 50% off so take advantage of it while it lasts. Once you're signed up, you can check out our MarketFolly clone in depth and even invest right along side it if you like. After all, it's now seeing 20% annualized returns! Check back in on Friday as we'll post an update regarding our cloned portfolio now that the next round of 13F filings are in.


Julian Robertson's Steepener Swap Play (Shorting US Treasuries)

Simply put, Julian Robertson is the definition of a hedge fund legend. And, his success is noted by the fortune he has amassed as he now graces the Forbes' billionaire list. He has pioneered a successful investment methodology, he has generated outstanding returns at his famous hedge fund Tiger Management, and his influence has sprouted some of the most successful modern day hedge funds in the form of the 'Tiger Cubs.' And, most importantly, he predicted the financial crisis two and a half years ago in an interview with Value Investor Insight. When he talks, you listen.

For those unfamiliar with Robertson, we'd highly recommend checking out the profile/biography we just wrote on him this morning. In that piece, we have outlined exactly why you should follow him (and the Tiger Cubs for that matter too). As we detailed in his profile, Robertson has a unique investment methodology. He takes a macro approach, finds a smart idea, researches it exhaustively, and places a big bet. And, when he feels he is more than correct, he will 'bet the farm.' And, it looks like we have identified Robertson's next play where he has and will continue to 'bet the farm.'


Julian's Big Bet

Let's start by making one thing clear: this is not a new position for Robertson. He has been talking about different forms of this play for a while now. But, since he has so much conviction behind this bet, we figured it would be prudent to take a closer look. Not to mention, his interview with Value Investor Insight was just published and it again highlighted his thoughts on this play. Today, we are going to highlight Julian Robertson's steepener swap play. In layman's terms, he is betting on inflation. Taken from eFinancialNews, "Steepeners are a type of interest rate swap, where one party agrees to pay the other a fixed rate in exchange for a floating rate, which is derived from the difference between long and short term rates. Many of these products also use high leverage, where the difference between the two rates is multiplied by up to 50 times to produce a higher return."

He thinks rates could hit 7% easily and could go as high as 18%. We agree with him on this play and we first published our very basic rationale behind shorting US Treasuries back in October of last year. The main point we're focused on is the wager that inflation is in our future. If such an outcome came to fruition, yields on long-term Treasuries would rise. When the yields increase, bond prices will drop, thus benefiting the short position. While the vehicles noted in this article are all slightly different in construction and purpose, they all broadly wager on the same outcome: inflation. Julian's talked about this play in numerous forms, and we actually first heard about his 'curve steepener' play in January 2008 in Forbes. That piece highlighted how Robertson was "long the price of two-year Treasuries and short the price of the ten-year Treasury - betting that the difference, or curve, in the yield between the two will increase." Such a play is negative on the US economy and Robertson executed it because he felt the Federal Reserve would continue to flood the economy with money. And, he has been right.

What's fascinating here is that retail traders and investors could put on essentially the same play using the marvels of exchange traded funds. If you wanted to put a curve steepener play on by going long the 2 year Treasuries and shorting the 10 year Treasuries, you could simply buy SHY (iShares Barclays 1-3 year Treasury etf) and then short IEH (iShares Barclays 7-10 year Treasury etf). This is an easy way to put on the same trade Julian played at the beginning of 2008.

Robertson ultimately feels that the US dollar will become so weak that it causes the central banks of China and Japan to stop purchasing Treasuries. As such, 10-year bond prices would move down and that's exactly what we've seen play out. Back in January of 2008, Robertson told Fortune, "I've made a big bet on it. I really think I'm going to make 20 or 30 times on my money." Moving on from his curve steepener play, we then heard Julian talk about a 'steepener swap' play at a Tiger Cub hedge fund panel. At the panel, Robertson joked that last Christmas his family would have “a steepener in every stocking." This is definitely one of Robertson's token 'bet the farm' plays if there ever was one.

In his recent interview with Value Investor Insight, Robertson lays out further rationale for his play. He says, "I'm amazed at the amount of money the government is throwing at this thing. You don't even react anymore unless somebody's talking about $1 trillion. I genuinely admire the administration's courage in doing what it's doing, but not the wisdom of it. I look at the TALF (Term Asset-Backed Securities Loan Facility) program, for example, and it's almost a bribe to get people to put on more leverage ... I ask anyone to give me an example of an economy beefed up by huge amounts of quantitative easing that did not inflate tremendously when or if the economy improved. I think what we're doing now will either fail, or it will result in unbelievably high inflation - and tragically, maybe both. That would mean a depression and explosive inflation, which is frightening."

While it may be frightening, it seems to be the scenario that Robertson is wagering on. After all, his steepener swap play will shower him with profits if rampant inflation rears its ugly head. He thinks that the US has not solved the current problems and things could go from bad to really bad. He likened the U.S.'s current situation to that of Japan in 1989, but thinks we are in far worse shape.


Notable Investors Bearish on US Treasuries

Robertson is most certainly not alone in his views. Numerous other prominent investors and hedge fund legends share his distaste for treasuries. We just recently noted that Michael Steinhardt says treasuries are a foolish play over the long term. He categorizes them as risky, noting that the yields are low and the danger is high. Steinhardt of course ran one of the first truly successful hedge funds (Steinhardt Management), garnering a 23% return each year for almost thirty years.

Additionally, acclaimed investor Jim Rogers also wants to short government bonds. Rogers is well-known for his stellar returns while managing the Quantum Fund (now defunct) with then partner George Soros. Rogers expects the government to buy Treasuries in an effort to stem borrowing costs. Rogers says that since Governments around the world are printing a ton of money and borrowing insane amounts that he almost has no choice but to short them. Rogers had previously been short the Treasuries, but covered them for the near-term in favor of waiting for another opportunity to short, as we noted when reviewing Rogers' portfolio. We could add even more talented investing names to this list, but suffice it to say that there is a confluence of smart minds all marching to the same beat.

When such a confluence of smart minds all wager on essentially the same thing (inflation), you should probably turn your head at the very least.


How To Play It

Now that we've seen so many smart minds interested in this wager, how do we play it? There are essentially a few different ways to place a bet on inflation similar to that which Robertson has made. The vehicles referenced earlier are not typically available to retail investors and traders. As such, we'll focus on ways that non-institutional players can protect themselves from inflation. Additionally, we'll take a quick look at the complex vehicles for those working at institutions with access to such products.

Exchange Traded Funds (ETFs) / Mutual Funds

The simplest way for retail investors and traders to bet on inflation is to bet against US treasuries by shorting them. Currently, there are a few ways you can do this. There are two exchange traded funds (ETFs) currently offered which index long-term treasury bonds. Ticker TLT is the iShares Barclays 20+ year treasury fund. Its performance corresponds to the price and yield of the long-term treasury market. As such, investors and traders who wish to bet on inflation (and against treasuries) can simply short TLT. Also, those who wish to play the 7-10 year Treasuries can do so via iShares Barclays Treasury index etf IEF. That vehicle corresponds to the price and yield performance of the intermediate term sector of Treasuries.

Additionally, you could also buy put options (LEAPs) on this index if you were so inclined. Buying puts on TLT is essentially the same bet as shorting TLT outright. We are not necessarily recommending using options to execute this play because of the leverage they employ, the time decay that moves against you, and the fact that we're not big fans of LEAPs to begin with. And, let's face it, such a large bet on inflation could take years to play out. As such, you're pretty much forced to use LEAPs if you wish to execute this play via options.

There is also another exchange traded fund currently out that 'ultrashorts' the treasury market. Its ticker is TBT and it is 2x the inverse of the TLT vehicle we just mentioned. However, there is one huge caveat with this play. Ultrashort ETFs reset on a daily basis and suffer compounding errors over time and noticeably more volatility. So, the longer you hold them, the more your results skew from the index they are supposed to be tracking. And, that is not something you want to experience when placing a longer-term bet on treasuries. Consider that over the past 1 year timeframe, TLT is up 1.43%. Theoretically, since TBT is 2x the inverse of TLT, TBT should be -2.86% over the same timeframe, right? Wrong. As you can see from the chart below, over the same time frame, TBT is actually -24.37% and has not tracked its index accurately over time at all whatsoever.

(click to enlarge)


This is why you should avoid using TBT for anything besides daily trades. There have been numerous articles published on this subject, and we recommend avoiding ultrashort ETFs. Additionally, since TBT employs leverage, it carries more risk. For the retail investor or trader, simply shorting TLT seems to be the best and easiest option at this point in time.

Investors also have the option of using the Rydex Inverse Government Bond Strategy mutual fund (RYJUX). This mutual fund has an expense ratio of 1.4% and essentially is the same as shorting TLT outright without leverage. RYJUX is a 1x short of 30-year Treasuries and is another option for investors who don't mind slightly less liquid mutual funds.

Lastly, while unrelated to the plays Julian Robertson has referenced, investors also have another option to protect themselves from inflation. Buying Treasury Inflation Protected Securities (TIPS) is an easy option that can be done via another exchange traded fund, TIP. This iShares Barclays etf is a bond fund that tracks the price and yield of the inflation-protected sector of the US Treasury market and is another vehicle that helps shield you.


Steepener Swaps / Constant Maturity Swap (CMS) Rate Cap

Now we'll turn our focus to the specific investment vehicle Julian has referenced. The vehicle is called a steepener swap and it is typically reserved for institutional investors.

In his recent interview with Value Investing Insight for May/June 2009, Julian Robertson says, "The insurance policy I would buy is called a CMS [Constant Maturity Swap] Rate Cap, which is the equivalent of buying puts on long-term Treasuries. If inflation happens the way it could, long-term Treasuries are just going to explode. Less than 30 years ago, long-term interest rates got to 20%. I can envision that seeming like a very low interest rate compared to what might occur in the future."

Option ARMageddon has also posted up a nice explanation of the vehicle courtesy of Tiger trader Pat O'Meara. They note that these are options to bet on interest rates rising for 10-year or 30-year treasuries. Option ARMageddon writes, "(Tiger trader Pat O'Meara) provides a current example, in which one could buy for $50,000 a five-year option, betting that the yield on $10 million worth of 10-year Treasuries rises above 4.2% between now and expiration in 2014. Including the 0.5% cost of the option, the break-even yield level is 4.7%." So, the vehicle is slightly more complex and definitely an institutional type of wager.


Other Inflationary Wagers

While Julian certainly thinks inflation is in our future, he is hesitant to buy gold. In the Value Investor Insight interview, he goes on to say that, "I've never been particularly comfortable with gold as an investment. Once it's discovered none of it is used up, to the point where they take it out of cadavers' mouths. It's less a supply/demand situation and more a psychological one - better a psychiatrist to invest in gold than me." While his argument makes sense, we found it intriguing seeing that we have tracked numerous prominent hedge fund managers moving into gold here on the blog.

Robertson's former colleague Stephen Mandel of Lone Pine Capital has a large call position on the Gold etf GLD. Additionally, respected hedge fund managers such as David Einhorn of Greenlight Capital, Eric Mindich of Eton Park Capital, and John Paulson of Paulson & Co all have sizable gold (and gold miner) positions. While Robertson doesn't like gold as an inflation play, he does have a few other recommendations. He likes natural resource stocks and then also says, "Zinc would also seem to me to be a very good inflation hedge."


Precautionary Note

While we have finally gotten around to writing a follow-up to our initial treasuries post, we do want to insert a note of caution. Year to date for 2009, treasuries are already down over 23%.

(click to enlarge)


The sudden and rapid decline is most likely due for a correction and we do not feel that the current time is ideal to initiate a position in shorting Treasuries. We would look for any sign of a rebound before putting on a new short position. That said, we still feel the move in treasuries will take many years to fully play out and this is a very long-term inflationary bet. While short-term moves like the one we've seen this year are nice, the full extent of the move could take years to come to fruition. We consider the publication of our post on this topic to be a contrarian indicator. After all, when there are headlines saying for you to get into something after a big move has already taken place, it's time to at least take some profits. So, place your bets with caution, as you'll have plenty of time before inflation truly rears its ugly head.

If you believe inflation is in our future, then 'bet the farm' with Robertson by buying steepener swaps, shorting US Treasuries, or buying puts on long-term Treasuries (whichever you have access to). As infomercials for rotisserie cookers like to enthusiastically exclaim, just 'set it and forget it.'


Profile/Biography on Hedge Fund Legend Julian Robertson (Tiger Management)


We're going to start a new series here on Market Folly that details the backgrounds of various hedge fund managers in a biography/profile format. And, to kick things off, we figured what better person to start with than Julian Robertson? For those unfamiliar with Robertson, then here's what you need to know: He is the definition of a hedge fund legend. After attending the University of North Carolina, Robertson served as an officer in the US Navy and worked as a stockbroker for Kidder Peabody. He then founded and grew his (now defunct) hedge fund Tiger Management from $8 million at launch to over $22 billion in 1998 at its peak. And, as listed on our Tiger Cub biographies page, Tiger compounded a gross rate of 31.5% between 1980 and 2000. But, after losses of 4% in 1998 and 19% in 1999, Tiger shut down as the dot-com bubble expanded right in front of his eyes. He avoided what he deemed to be 'irrational investing.' The tech bubble would indeed be irrational investing, but his fund wouldn't be around to see it through. A few major bets of his went south (including US Air) and enough was enough.

In terms of his investment style, Robertson takes a macro approach, finds a smart idea, researches it exhaustively, and places a big bet. And, when he feels he is more than correct, he will 'bet the farm.' Since Tiger's closure, Robertson has put up equally impressive performance numbers managing his own money. Back in January of 2008, it was noted by Fortune that Robertson had seen a total return of over 400% in the 8 years gone by since closing his fund. And, he even predicted the financial crisis over two years ago.

Not only has Robertson done well for himself, but he has essentially reinvented Tiger Management in the form of 'Tiger Cubs.' After Tiger Management's dissolution, numerous analysts and right-hand men started their own funds. These funds were nicknamed 'Tiger Cubs' due to their ties to Robertson and his old fund. The principles, research, and investment methodologies instilled by Robertson at Tiger now are carried on (in slightly modified forms) by numerous other hedge funds; many of whom we cover here on Market Folly in our hedge fund portfolio tracking series. Now legends in their own right, well-known Tiger Cub managers include Lee Ainslie of Maverick Capital, Stephen Mandel of Lone Pine Capital, John Griffin of Blue Ridge Capital, and Andreas Halvorsen of Viking Global, amongst many others.

Robertson also gave start-up money to a handful of younger analysts when he unwound his fund. These seeded Tiger Cubs became mentored by Robertson and began their own track records of success. Two of the most well-known funds Robertson initially seeded include Chase Coleman's Tiger Global and Bill Hwang's Tiger Asia. As of the beginning of 2008, Tiger Global's 7 year average return was over 43%. As you can see, Robertson's ways still live on through many other successful funds. In fact, we noted that hedge fund portfolio replicator Alphaclone has even created a Tiger Cub clone portfolio that has beaten the S&P 500 by 15% annualized since 2000 by using a portfolio cloning the positions of all the Tiger Cub hedge funds.

Robertson's success has landed him on Forbes billionaire list and it really should come as no surprise. These days, Robertson is both managing his own money and monitoring his stakes in the various Tiger Cub funds he seeded. He often shares his thoughts and positions with them and vice versa. It is often a round table of ideas in which Robertson has fun becoming re-energized by the youthful players he surrounds himself with. Additionally, Robertson is an active philanthropist and serves on numerous boards nowadays.

In terms of his recent action, we posted in February that he is extremely bearish on both US and world markets. He likens our situation to that of Japan in 1989 but thinks we are worse off. As we've also noted numerous times in the past, Robertson is fond of the payment processing duopoly of Mastercard (MA) and Visa (V), as they bear no credit risk. When we saw Robertson's portfolio, we also noticed that he held various tech giants such as Apple (AAPL) and Microsoft (MSFT). Julian was not alone in his fondness for Microsoft, as his former right hand man John Griffin of Blue Ridge Capital also has a very large MSFT stake. You can see Julian's thoughts on his positions in his video interview with Bloomberg.

Taken from his very recent May/June 2009 interview with Value Investor Insight, Julian also has revealed some of his other portfolio moves by saying, "We own an Indian Zinc mining company called Hindustan Zinc (HZ:IN), which is probably selling for 4-5x earnings. Zinc is an important component in a wide variety of alloys, and has recently been selling for below its cash cost of production. You almost know that isn't going to last. Zinc would also seem to me to be a very good inflation hedge. I love energy stocks. Without making any prognostication on oil prices, we think based just on cash flow that oil stocks are very attractive, and of course will be much more so if oil prices return to anywhere near where they were last summer. Some energy stocks we own are Occidental Petroleum, Talisman Energy, Ultra Petroleum, and TriStar Oil & Gas. I really like some of the Canadian oil-sands plays, because there's probably more leverage to the price of oil there than anywhere else ... Equities are certainly better than cash. In particular, I'd expect the best things to buy to be natural resources stocks." So, there you have it. Robertson definitely sees natural resources and energy plays as a nice investment going forward.

And, most notably, Robertson has been buying puts on longer-term treasuries. He thinks rates could hit 7% easily and could go as high as 18%. He's talked about this play in numerous forms, as he also recommended playing a steepener swap at a Tiger Cub hedge fund panel. This morning, we've just written an article that elaborates on this thesis in detail. You can read about Julian Robertson's steepener play here. We'd highly recommend it, as this is shaping up to be one of Julian's "bet the farm" plays.

Simply put, Julian Robertson is a hedge fund legend. He's generated ridiculously solid returns, he's carried on his legend in the form of the Tiger Cubs, and most importantly, he predicted the financial crisis 2.5 years ago. If he's not worth listening to, then we don't know who is. For more information on Julian, check out Daniel Strackman's book entitled, Julian Robertson: A Tiger in the Land Of Bulls And Bears.


James Pallotta's Hedge Fund Raptor Capital Winds Down

In quite an interesting development, James Pallotta's hedge fund Raptor Capital Management will shut down for the time being. Readers will be familiar with Raptor because we had just started tracking them in our hedge fund portfolio series. Unfortunately, their spot on our list will be vacated for the time being until they decide to return. Pallotta sent out a letter to investors where he suspended redemptions and said they will be winding down the funds as they return capital to investors starting in July. Pallotta said, "I intend to step back from day-to-day investing for a few months to spend valuable time crafting an optimal investment strategy in order to capitalize fully on the next several years' developing investment opportunity set."

So, while Pallotta may be closing shop for now, it does sound like he has intentions to return fresh and with a solid game plan. He continued, "Consistently, in recent years, I have conveyed my skepticism regarding the sustainability of certain aspects of the industry's structure and short term focus. (There is) a place for a model which aligns the interests of investors and managers toward the goal of truly-shared compounding of superior risk-adjusted returns over time." It sounds as if in addition to crafting a new investment strategy, that Pallotta is crafting a new fund structure as well. He wants investors to keep money in place for multiple years, a setup used in many private equity funds.

He must feel that this would allow him to make long-term investment decisions, rather than worrying about near-term performance. Additionally, he wouldn't have to worry as much about redemption requests, a fear that was realized in the hectic year of 2008 as investors demanded their money back. This will be interesting to monitor whenever he decides to return.

Additionally, we found it interesting to note that Pallotta will apparently provide seed capital to a few analysts who will be starting their own hedge funds, in a move similar to that of hedge fund legend Julian Robertson (who did so with the Tiger Cubs).

Raptor's funds were pretty much flat for the year through May in terms of performance, according to the letter. Our only look at Raptor's performance was included in our March hedge fund numbers, where we saw Raptor -1.34% for the year at that time. We began tracking Raptor because it was being spun-off from Paul Tudor Jones global macro fund Tudor Investment Corp. Pallotta was responsible for all of the solid performance in their equities fund (called Raptor there as well). Pallotta spun off the fund and we followed him due to his solid track record of returning 13.85% a year from 1993 until 2008 while at Tudor. Raptor managed $9 billion in its peak at Tudor and currently manages around $800 million. You can view some of Raptor's portfolio here.

Raptor joins the growing list of prominent hedge funds to shut down amid the crazy markets of 2008 and 2009. Just last week we detailed the closure of Art Samburg's hedge fund Pequot Capital. Overall, 2008 was definitely a bleak year in hedge fund land. A few other notable closures we've covered on the blog include Satellite Asset Management and Okumus Capital. (See the list of other 2008 closures here).

Here is James Pallotta's letter to Raptor investors (RSS & Email readers will need to come to the blog to view it):


Tuesday, June 2, 2009

Wall Street 2 The Movie: February 2010 With Michael Douglas & Shia LaBeouf


We're starting to get more concrete details regarding the release of Wall Street 2 the movie. Back in April, we touched on the fact that the movie was green to go and will mark the return of Michael Douglass as Gordon Gekko and Oliver Stone directing. Unfortunately, Charlie Sheen's character Bud Fox will not be making another appearance. Just recently though, it was revealed that Shia LaBeouf and Javier Bardem are now official cast members.

LaBeouf (who you will see parading around in Transformers 2) will play a young trader who is engaged to Gekko's daughter, while Josh Brolin (*updated) will play the 'villain' role as a (wait for it...) hedge fund manager. Ah yes the hedge fund manager profession continues to have a sterling reputation (sarcasm). The only role yet to be filled seems to be that of Gekko's daughter. They will begin filming in August and are shooting for a February 2010 release date. Director Oliver Stone has already scouted various areas to shoot including the New York Stock Exchange. Allan Loeb is writing the script and you may know his work from other movies 21 and Things We Lost In The Fire.

If you don't want to know the general plot line, then don't read any further...


Apparently the film will start with Gekko's emergence from prison as he rebuilds his career over 20 years later. Shia LaBeouf's character is a trader who is engaged to Gekko's daughter and wants to make it to the 'big leagues' on Wall Street. In order to do so, he makes a pact with Gekko in exchange for helping Gekko repair his relationship with his daughter.

The film will have a modern feel as its timeline will span from June 2008 and into the various bailouts. Bardem's character will be a villain hedge fund manager who apparently is the target of revenge by LaBeouf. The rest of the plot line (if there is more?) remains to be seen and we shall all have to wait with bated breathe. Minyanville has even come up with their own mini script of the new flick.

In order to prepare for such a spectacle, we'd recommend watching the original Wall Street in all of it's 1980's glory. You can pick up Wall Street on DVD here (20th Anniversary edition) and on Bluray here. We'd consider this an essential timepiece for anyone involved in markets as it has graced our previous list of gifts for those in finance.