Saturday, August 1, 2009

Most Popular Articles On Market Folly

It's been a little while since we last highlighted the most popular articles on Market Folly, so we wanted to point out the posts receiving the most views as of late:

1. Chartered Hedge Fund Associate (CHA Designation) - Exclusive $50 discount for Market Folly readers

2. David Einhorn's hedge fund Greenlight Capital stores physical gold

3. Free 14 Day Trial of Alphaclone - Our favorite hedge fund portfolio replicator

4. Trader The Documentary: 1987 PBS Film featuring hedge fund great Paul Tudor Jones

5. Crude Oil - Interview with CME Group's Joseph Ria

6. Profile/Biography on Bill Ackman & Pershing Square

7. Hedge fund Blue Ridge Capital's recommended reading lists

8. Performance numbers from hedge funds in June

9. Discounts on financial publications

10. Hedge fund legend Julian Robertson's steepener swap play

Thanks for reading as always. If you enjoy our work, please consider making a donation (via PayPal or credit card). It definitely takes a lot of time to run a site and we appreciate your support!

Last, but not least, make sure you're getting our daily updates for free via email or for free via RSS reader.

Friday, July 31, 2009

Gold Chart: $1000 & $900 Are Key Levels

We're back with some more gold technical analysis. It doesn't take a genius to point out that both $1000 and $900 are the key levels in gold, if nothing more for pscyhological reasons. Gold has stalled out around $1000 in the spot market numerous times and it is a level of extreme resistance. The traders over at MarketClub put out another technical analysis video on gold earlier in the week and we wanted to cover what they're seeing.

They filmed it after the big down day in gold and are now cautionary on the precious metal as their trading signals say to get out and watch from the sidelines for now. They looked at the Fibonacci retracements and identified some potential levels of support/logical areas where gold could bounce. They identified $924 as a possible entry level. They think gold will continue to pull back in the near-term but would like to get long on any sign of a nice reversal. If it drops severely, $900 could be a key support level since it is a round, psychological number that often will act as support. Keep in mind that they are performing technical analysis on spot gold and retail traders can play gold via the exchange traded fund SPDR gold trust (GLD) or the Comex gold trust (IAU). You can watch their latest gold video here.

We also wanted to point out one other thing that we were personally seeing on the gold chart. If you examine it on a multi-year timeframe, there could potentially be an inverse head & shoulders pattern shaping up. For those unfamiliar, this technical pattern is typically pretty bullish. And, since the pattern has been taking many months to shape up, this could eventually merit a big move.

(click to enlarge)

We've outlined the potential inverse head and shoulders pattern with green lines. The first shoulder was around $850 in March of last year, the head is around November of last year at $750, and the most recent shoulder has been taking shape throughout the course of 2009 around $850 and above. As you can see above, the red line at $1000 is pretty solid resistance and any major move in gold will have to break above this huge technical and psychological level. We've been tracking gold on the blog a lot lately simply because there are a ton of hedge fund managers long gold right now. David Einhorn's Greenlight Capital has stored physical gold and John Paulson's hedge fund owns a ton of GLD, among many other prominent managers.

We use technical analysis as one of the many tools in the investing/trading toolbox. After all, you can never have too much information. The fundamentals can tell you the 'why' whereas the technicals can tell you the 'when' and 'how' in regards to entering and exiting positions. We highly suggest checking out our technical analysis recommended reading list to further your knowledge in this area, at the very least to expand your information arsenal.

Amaranth Hedge Fund Investor Letter

Presented without comment is the latest investor letter from hedge fund Amaranth. If you're unfamiliar with this fund, they had previously managed up to $9 billion until they essentially collapsed back in 2006 after a natural gas trading fiasco. The firm was founded by Nicholas Maounis and he is the author of the letter below. Brian Hunter is the trader who became infamous for the natural gas trades and he has since founded a hedge fund, Solengo Capital Advisors. Ah yes, another fine example of the hedge fund boom bust cycle we see so often. When will investors learn?

Anyways, we digress. The document is embedded below and you can also try to download the .pdf here but there's no guarantees that link will still work.

Amaranth-Q1-Q2 Investor Letter (2009)

Commodity Bull Market - Interview With Brett

This week we're exchanging interviews with Brett over at Commodity Bull Market. A few days ago, Brett interviewed us for the first leg of a 2 part interview (you can check it out here). And today, we've done the first part of his interview. Brett has been a friend of ours in the blogosphere for a while now and fills a niche in commodities. Here's part 1 of the interview:

1. Can you give us a little background about your investment

Sure - it's definitely evolved over the years. I started as a pure
fundamental guy, and purely stocks - Benjamin Graham, Warren Buffett were my idols. Buy cheap and sell dear.

Then I started to believe that picking the right asset class was more
important than picking the right asset. I read Jim Rogers' Adventure
Capitalist for the first time in 2004, and it was almost a religious
experience for me. He made investing sound so easy - "just look for money
sitting in the corner, and go pick it up".

Then I bought and read his instant classic Hot Commodities as soon as it
came out and thought wow, this guy is right - commodities are going to boom.
How can I get in on this?

2. So would you still call yourself a fundamentalist, just focused
more on the commodity sector?

For awhile I was - I'd look at the fundamentals of, say, sugar. Big picture
fundamentals, like year over year supply/demand trends. This is what I did
back in 2005, before I made my first purchase. If the odds looked to be in
favor of a supply deficit, I'd buy some futures contracts.

As time went on, for better or for worse, I started paying attention to the
technical picture as well. I sustained some very large losses that could
have been prevented had I employed some basic stop-loss formula. So I did
some more reading up - Winner Take All was a great book that opened my eyes,
along with Trade Your Way to Financial Freedom - and began buying during
uptrends and breakouts, and using protective stops.

Links for book reviews:

3. Cool - so what inspired you to start your blog?

When I started researching commodities in early 2005, there were very few
good resources. There was Rogers' book. And there's the CRB Yearbook. But
not much covering the day-to-day, week-to-week happenings. At that time,
there was just a small blurb about commodities each day in Section C of the
Wall Street Journal - you didn't have oil all over the front pages.

So I figured I'd start up a blog, and see where it went. If nothing else, I
had made some early money trading futures, and thought that if I ended up
pissing it away, at least I should have a record of the gains to remind me
of the good times!

4. When you started blogging, did you ever imagine it'd take off like
it has?

Not at all! In fact, nobody read it other than a friend or two for the
first year. Slowly and steadily, readership has been building through the
years, and it's been a real blast. Reading about the markets is my favorite
pastime, I'd do it all day if I could! So blogging on these topics is
really a lot of fun, and I'm flattered to have developed a regular

5. Tell us a little about how you gear Commodity Bull Market towards
your readers - especially as it pertains to your personal research and
investment philosophy.

To be honest, it's something that's constantly evolving. One thing I try to
do is present both sides of an argument. For example, the
inflation/deflation argument - until recently, I'd say I was leaning
inflation, and recently have started leaning deflation. I try to present
both sides of the argument, because, both are certainly valid, and at the
end of the day nobody really knows what's going to happen anyway!

Folks seem to appreciate this, as they've expressed to me they are sick and
tired of financial analysts who insist they know the answer.

So the site, as you can tell from the name, is pretty focused on commodities
- because I still believe that's the last bull market standing. However, I
now think we're due for another potential crash in the sector, so I'm trying
to take a step back and brainstorm about ways to play potential scenarios
that unfold.

But like I said, at the end of the day, nobody really knows for sure whether
it will be inflation or deflation - so we're trying to highlight ways to
protect capital no matter the scenario, and then react profitably where


Thanks to Brett for taking the time out to answer some questions and to give us a better idea as to where he comes from.

What We're Reading 7/31/09

An interview with Market Folly (a.k.a. yours truly) [Commodity Bull Market]

10 iPhone Apps for Investors [ETF Database]

PIMCO's Richard Clarida talks inflation [Pragmatic Capitalist]

Insiders are selling [Marketwatch]

Thursday, July 30, 2009

Hedge Fund News Update

This is the latest edition in a new series of posts we're doing here at Market Folly entitled, 'hedge fund news summaries.' And, as as the title obviously states, the goal is to give you the quick hits of everything that is happening in hedge fund land. So far, reader response has been very positive and we thank you for the feedback. As such, we will continue posting them since many have found them useful. You can check out our most recent hedge fund news summary to catch up to speed as well.

Seth Klarman (Baupost Group) - The value master himself has recently been "up to no good." And, by that, we simply mean he has been active making investments. Intriguingly enough, Klarman's latest target has been CIT Group (CIT). Before you avid Klarman-ites become appalled and outraged at this move, settle down... this is a pretty good deal for him. (Obviously, right? Why else would he do it?) Klarman's hedge fund Baupost Group was part of the assembly of funds that provided financing for CIT. Baupost joined Centerbridge Partners, Oaktree Capital Management, Pacific Investment Management, and Silver Point Capital, among others. The reason this deal was so enticing to Klarman and others is that the deal was heavily over-collateralized. Supposedly, the loan is backed by $30 billion worth of assets. Additionally, Klarman and the others will be receiving an enticing interest rate of Libor + 10 points with a 3% floor. Later, it was also revealed that this group of lenders also received an upfront 5% fee. So, what's not to love about that deal? CIT was desparate for help, and they got it. We ponder if this is another situation where a prominent investor gives his 'stamp of approval' to a company in return for a great return on capital. While we think this specific situation is more-so due to CIT's dire situation, we're sure they don't mind being associated with Klarman & Baupost. In other recent Baupost news, we saw that they sold completely out of their Omnova (OMN) position. You can check out the rest of Baupost's portfolio here.

Pav Sethi (Gladius Investment Group) - Pav formerly worked as the head of volatility arbitrage at Citadel Investment Group and will be starting his own firm Gladius. With Pav also goes Rajesh Kedia and Bertrand Divet as Citadel loses a few more team members. They will be focused on what they excelled in at Citadel: volatility.

Paul Tudor Jones (Tudor Investment Corp) - Back in 1987 a documentary was filmed on Paul Tudor Jones and his hedge fund entitled 'Trader: The Documentary.' This film has become scarce and almost a form of trader contraband as Jones reportedly bought almost all available copies in the 1990's since he didn't want the flick floating around anymore. But, as with all great information, this video wanted to be set free. As such, the film was recently leaked onto the web and we posted it up yesterday. So, if you missed it, you can watch and/or download the video here.

5:15 Capital - In our last hedge fund update we mentioned the formation of a new hedge fund by some Brevan Howard alums. Named after a song from 'The Who', 5:15 has recently gotten an injection of $50 million from Man Group, one of the largest hedge fund managers on the globe. As part of the setup, Man Group will take a portion of 5:15's revenue. The Man Group sees 5:15 stepping into a nice niche in terms of hedge fund strategies, as the crisis has left the field relatively empty in their type of arbitrage.

Warren Buffett (Berkshire Hathaway) - We aren't limiting our hedge fund updates to just hedge funds, as we're now also covering gurus and market strategists. Obviously, Buffett falls into this category. Buffett recently filed a 13D on Moody's (MCO) that disclosed he had sold 7,986,300 shares of the company ranging in prices from $26.59-$28.73. Despite the sales, Buffett still owns well over 40 million shares of the company. But, this filing is interesting to note because Buffett had previously championed the ratings agencies in public as solid investments. Has he had a change of heart? We'll continue to monitor the filings to see if he sells even more. Our immediate reaction was to wonder if he had been chatting with fellow value player David Einhorn of hedge fund Greenlight Capital. Einhorn recently presented the case for shorting Moody's at the Ira Sohn investment conference. It's always interesting to see a difference of opinion among smart minds, so that's why Buffett's selling becomes all the more curious. For further interesting reading, you can view Berkshire Hathaway's Annual Report here and investment ideas from hedge fund managers at the Ira Sohn conference here.

John Burbank (Passport Capital) - We just covered Passport's recent investor letter and saw some interesting developments in their portfolio. Most notably, we found out that they had been playing with interest rate bets including a curve steepener. Additionally, they have started to bet on the Japanese Yield Spread via 5-year CMS caps (calls), anticipating a rise in 10-year rates. Passport also likes Healthcare stocks as they are at the highest allocation in the fund's history. To read about the latest from Passport Capital, check out their latest investor letter update.

Jim Rogers (ex-Quantum Fund) - The market guru himself has been out and about in the media talking about his usual theses and positions. So, we don't really have a whole lot of new information to report in this regard. We just want to point out that (yet again) Rogers is very bullish on commodities.

Fortress Investment Group - The massive $27 billion hedge fund Fortress Investment Group is on the prowl for potential investments. However, they're not looking for market investments in the typical sense. Instead, they're looking to acquire other hedge funds and financial firms. Daniel Mudd, Fortress' new CEO, has said they will try to acquire money managers, banks, insurers, hedge funds, and the like. The industry in general has definitely seen a contraction as the weak fall by the wayside during the crisis. Since there have been many opportunities in the markets throughout the course of the crisis, it will be interesting to see if Fortress finds any 'deals' in the hedge fund landscape.

Andreas Halvorsen (Viking Global) - A few days ago we also covered Viking Global's latest investor letter. In the letter, we found out that they had lagged the market in the 2nd quarter of 2009 due to their short positions. More interestingly though, was the fact that they added a ton of new positions over the past quarter, 68 in all. They warned that all the new additions were not a bet on rising markets, but rather a result of their fundamental, bottom-up analysis. Their top 10 long positions as of the end of June were Invesco, Mastercard, Visa, Unilever, DirecTV, Google, JPMorgan Chase, Walt Disney, Bank of America, and Qualcomm. To find out what Viking Global has been up to, check out their portfolio update.

The Fine Violins Fund - No, we are not joking. Florian Leonhard is trying to raise capital for a Fine Violins Fund. Leonhard is a well-known violin restorer from London and has so far raised 16 million euros for the fund. He hopes to raise 60 million euros in total and seeks to invest in pre-19th century violins, primarily from Italy. Leonhard is targeting a portfolio of 50 violins and he will loan the violins out at no charge to musicians. In the past, we've touched on other obscure investment funds, such as a fund that invests in wine, a few funds that are investing in lawsuits, and another fund that invests in guitars. The musical instrument theme seems to be picking up steam and we'll have to see if a Trombone fund pops up next. Let us know if there are any other interesting funds out there that we might be missing out on. These types of funds are the definition of the term 'alternative asset class'.

David Rosenberg (Gluskin Sheff & Associates) - In our last article on Rosenberg, we noted his fondness for corporate bonds and his thoughts that the stock market in general already had a bunch of good news priced in. Rosenberg has been re-iterating his call on corporate bonds, this time saying that "they are still pricing in a very bad economic and financial market scenario. Moreover, the yield spread is still wider than at any point during the 2001 or 1990 recessions of the 1998 LTCM/Russian debt default freeze-up. In fact, history suggests that the corporate default rate would have to rise well above 7% for corporate bonds to deliver negative returns with yields as high as they are at around 7.25%." Additionally, in media appearances over the past month or so, we wanted to point out that Rosenberg indeed sees inflation as a threat. However, he says that threat is many years away. He also thinks we easily go through past unemployment levels of 10.8% and that from March to May, the stock market has essentially seen a 40% 'dead cat bounce'.

Hugh Hendry (Eclectica Fund) - Hugh is focused on the deflation versus inflation debate lately and he notes that he has never seen such a 'crowded trade' with people so confident that inflation is in our future. He favors bonds over equities and he thinks that deflation is the bigger risk here. Hugh says that, "It's almost as if we have this flood, but people are buying fire insurance." He is actually in favor of government bonds and notes that this is due to his contrarian nature. He is not too focused on the equity markets currently but says he will 'prod them' around August or September to see what is really going on there. We've covered Hugh's thoughts on the blog in the past and you can view his past investor letter here.

Michael Steinhardt (WisdomTree Investments, ex-Steinhardt Partners) - Hedge fund legend Michael Steinhardt sat down and talked with Bloomberg back in early June. While this is obviously not as recent as some of the other developments we've pointed out, we are highlighting it due to the excellent content in the interview. He talks about returns in equity markets going forward, the current stock market, the role of hedge funds, and what people should be investing in these days. We highly recommend watching the interview and you can view the video embedded below. (RSS & Email readers will need to come to the blog to view the video). In the past, we've also covered Michael Steinhardt's view on treasuries, as he says they are foolish.

Thanks for checking out our updates and stay tuned for more daily coverage of hedge fund land. In the mean time, make sure to also check out our recommended reading lists and our hedge fund portfolio tracking series.

Wednesday, July 29, 2009

Passport Capital Details Curve Steepener Play (Investor Letter)

John Burbank's hedge fund Passport Capital has released their latest investor letter and there are quite a few interesting bits of information included. Most notably, we see that Passport likes basic materials, curve steepeners, the Japanese yield spread, and healthcare stocks. We'll get into specifics about each below, but let's first dive into their most recent performance numbers.

Year to date for 2009, Passport Capital is up 25.4% compared to the S&P500 being up only 3.2% over the same timeframe. Passport was up 18.1% for the 2nd quarter of 2009 and now has seen a 26.4% compounded net return since inception. This phenomenal number comes against a -3.1% return for the S&P500 over the same period. Overall, Passport's main fund now has $1.3 billion under management and their firm as a whole manages $2.1 billion. You can view numerous other hedge fund performance numbers in our June hedge fund update.

Portfolio Specifics

We're going to work backwards here and are first going to start with the specific portfolio positions Passport mentions. Because let's be honest, that's what everyone is really curious about anyways. They have increased their short exposure and at the same time have reduced their net exposure. They were basically taking profits from the massive gain they saw in May and decided to hedge their portfolio.

Curve Steepeners

Firstly, we must point out that Passport took profits in their yield curve steepener recently (specifically, the 2-10 year curve). However, they still hold some of the position and are looking to add to it should the curve flatten or if volatility decreases. Currently, they see short-term deflationary pressures that will steepen the curve going forward. Passport purchased 2-10 year curve steepeners in the first half of 2008 for $80.3 million that had a notional value of $24.3 billion. At the most recent quarter end, these positions had a notional value of $11.4 billion. As mentioned earlier, they have taken profits on the position and still remains bullish on the curve steepener as a play. As of June 30th, 2009, Passport had $100 million invested in these vehicles. We point all of this out because previously here on Market Folly we focused on hedge fund legend Julian Robertson's steepener swap play. Although the plays are slightly different, we'd highly recommend everyone check out the article for a better understanding as to what these hedge funds are betting on.

Japanese Yield Spread

John Burbank's hedge fund also focused on another interest rate trade, but this time in Japan. Passport has purchased 5-year CMS caps (calls) on the Japanese yield spread of the 5-10 year. Their position will become profitable should 10-year rates rise over the upcoming five years. They have risked $40 million to gain anywhere from $88 million to $240 million should things go as planned. Their rationale behind such a play is as follows: "Given these ratios and Japan's witches' brew of cyclical downturn, secular stagnation, the effects of aging on productivity and risk tolerance, the 1.36% yield on a 10-year Japanese Government Bond may surprise the uninitiated. For over fifteen years Japan's citizens and corporations have retreated from risk while easily financing their government's fiscal largesse with their significant savings and trade surpluses. Given the absence of inflation, currency risk, and compelling alternatives for most JGB investors, very low yields made sense. Looking forward, however, we assign a high probability to the prospect of persistent deterioration of fiscal and trade balances. With deteriorating finances come an even higher debt/GDP ratio, yen weakness, and rising dependence upon foreigners. Mounting financial stress means political pressure on fiscal policy and GDP. Each of these forces should place upward pressure on JGB yields and volatility, and their confluence could produce a step-function change." Whew, everyone got that?

Healthcare Stocks

Although their fund has only 11% of their NAV dedicated to healthcare, it is the highest weighting in their fund's history. And, that should say something. They like this sector due to the uncorrelated market returns and the fact that there is a bullish case for both the short-term and long-term. They also cite demographics, political realities, and profitable business models as compelling reasons to own healthcare names.

Basic Materials

Passport has been bullish on natural resources/basic materials for a little while now and it has been a large part of their long portfolio. When we last covered Passport's portfolio, we noted that they had a lot of exposure to base metals, fertilizer, and gold. And, specifically, we saw them add massively to their gold stake. For a current look at gold's situation, check out this technical analysis video that says we could see the metal rally up to $980 before cooling off. We have covered gold a lot on the blog recently solely because we've seen a ton of hedge funds in it. David Einhorn's Greenlight Capital recently moved to storing physical gold. John Paulson's hedge fund firm Paulson & Co owns a ton of gold via GLD, and there are many other prominent hedge fund managers that own the metal. Additionally, hedge fund firm Sprott Asset Management recently harped on the 'real assets' theme in their July market commentary.


Lastly, we also wanted to highlight the fact that Passport sees the technology sector as ripe for the picking. Specifically, they like internet business models around the world on the long side.

Short Positions

Passport is short companies within the financial and consumer sectors. They say they are short companies that have deteriorating fundamentals and highly indebted capital structures/customers. They have also bought put options on indexes which could be classified either as a hedge or a short position, depending on how you look at it. As volatility has come down, these options have become priced very cheap and David Einhorn of Greenlight Capital also pointed this out in his latest investor letter. Additionally, Passport has also hedged some of their basic material and technology exposure. They were net short the consumer to the tune of -13%. In the technology sector, Passport likes short opportunities in companies that relate to product cycle technology since they are more susceptible to economic downturns.

Portfolio: General Information

Okay, so let's dive right into the other good stuff. Passport has 94 long positions, 122 short positions, and 12 private investments. They were 88% long, -59% short for a gross exposure of 147% and a net exposure of 28%. Their top 10 long positions were 34% of their exposure. They are long basic materials, India, healthcare, energy, and emerging market financials. Their longs were +34.5% for the quarter while their shorts lost -15.7% gross. Passport was net long basic materials to the tune of 25% and India to the tune of 13%. Those two long sector bets were their largest wager. On the short side of the portfolio, they were net short the consumer and 'other' as previously mentioned (where 'other' constitutes index puts among additional positions).


Passport also goes on to say that the "legacy of the financial crisis is asset-price deflation. The credit bubble drove overproduction of goods and services that the downturn has exposed as overcapacity. Now the world is eliminating capacity while relying upon fiscal stimulation of demand. This process will take time." They continue believe that inflation will be the long-term outcome of all of this. However, they are actively managing positions and are being nimble for the time being, as there is no telling how long this could take to play out. They believe inflation will prevail due to "the political appeal of inflation in the context of daunting unfunded liabilities, the political and practical difficulty of tightening historically loose fiscal and monetary policies, and global understanding of the problematic position of the US dollar." They go on to note that the market will overreact to both deflationary and inflationary signals and that focusing on the long-term strategy here is essential.

Passport again harps on their desire to be long the economies of China, India, and the emerging world, preferring those to that of the Western world. Among many reasons, they like the fact that there is a growing demand for natural resources; resources that there are a finite supply of. As such, they are obviously bullish on commodities as well. They go on to point out that, "market economics eliminate excess capacity while government subsidies maintain it. The Darwinian existence of commodity producers means that their pricing power is improving while their industries' ability to satisfy longer-term, normalized levels of commodity consumption is deteriorating."

Additionally, John Burbank's hedge fund sees negative consequences for the US dollar going forward. They point out that the rise in the dollar through the crisis was due to high demand during a period of extreme deleveraging. Passport instead likes currencies such as the Australian and Canadian dollars, the Chinese renminbi, Norwegian krone and some Middle Eastern currencies. They favor these because of trade surpluses and higher returns.

Turning now to specific fund matters, we see that Dipak Patel has resigned from Passport after the trading scandal involving their India Fund. John Burbank will continue to manage the fund. In terms of redemptions, Passport saw 7% of fund assets go out the door in the second quarter ($105 million). However, the second quarter also marked the first significant inflows in capital since 2008. Due to their poor performance in 2008, they still have a high-water mark and current investors looking to add to their stake in the fund will be charged no performance fee until the carry forward losses have been recouped.

For more information on John Burbank and Passport, make sure to check out our background information and portfolio update on the fund. Additionally, for more in-depth performance metrics, check out their June 2009 performance attribution sheet. Their top 10 public long positions as of the end of June were Riversdale Mining (RIV.AU), Financial Technologies (FTECH.IS), Jordan Phosphate Mines (JPH.JR), Mosaic (MOS), Potash (POT), EFG-Hermes Holding (HRHO.EY), China Lotsynergy (8161 HK), Shuaa Capital (SHUAA.UH), London Mining (LOND.NO), and AK Steel (AKS).

Those of you interested in reading Passport's latest investor letter can try to download the .pdf here as long as the link works.

Tuesday, July 28, 2009

Trader The Documentary: Paul Tudor Jones In 1987 PBS Film Glory

*Update: The link to the third party site hosting the video has been removed at the request of the copyright holder. For more information on the documentary, please see this link.

Paul Tudor Jones drinks Budweiser and trades Deutsche Marks in the early morning Hong Kong time. No lie.

Viking Global's Short Positions Cause Lag: Investor Letter

Andreas Halvorsen's hedge fund firm Viking Global was up only 0.5% net in the second quarter of 2009. This is compared to a 15.9% gain for the S&P500, and as such Viking is lagging substantially. In their latest investor letter, Andreas attributes this to the fact that their shorts constituted a higher drag than they normally would in a rising market. Their long-short spread for the quarter was -11% due to a return of 17% for their longs and 27.9% for their shorts. Simply put, their longs only rallied as much as the overall market did, while their shorts rallied more than the general market. Their gross exposure is now 112%, up from a previous 86% due to increased market movements and new ideas. Their net exposure is up to 37% from 29%. What's interesting is that despite the increases in each, they anticipate a further rise in gross exposure.


Viking had 145 equity positions at the end of the quarter (up from 125). Of those total positions, a whopping 47% of them were new positions started during the 2nd quarter. Viking made it explicitly clear in the letter that these 68 new positions are a result of their bottom-up stock picking style and "should not be interpreted as a bet on continued rising markets." Overall, they have 65 longs and 80 shorts where the largest long is 4.2% of the portfolio and their largest short is -2.3% of the portfolio. Their Viking Global Equities III Fund has $6.6 billion under management while their firm as a whole has $10 billion under management.

Long Positions

Their top 10 long positions as of Q2 2009 are as follows:

1. Invesco (IVZ)
2. Mastercard (MA)
3. Visa (V)
4. Unilever (UN)
5. DirecTV (DTV)
6. Google (GOOG)
7. JPMorgan Chase (JPM)
8. Walt Disney (DIS)
9. Bank of America (BAC)
10. Qualcomm (QCOM)

The top 10 positions listed above represent 32.2% of their capital.As you can see, this upper echelon of the portfolio is slightly different from when we last covered Viking's portfolio. Most notably, we see that Invesco has shifted up to top spot in their portfolio at 4.2% of capital. They believe that Invesco's "streamlined organization and improved investment performance position it well for continued growth in assets under management and a substantial widening of operating margins. Invesco has begun to generate positive net asset flows, which we expect will continue in the coming quarters. In addition, the company's option to participate in consolidation opportunities in the asset management industry adds to its attractiveness."

What is also intriguing is that 5 of their top 10 positions are either new or re-entered positions, including: Bank of America, Walt Disney, JPMorgan Chase, DirecTV, and Unilever. These positions leapfrogged a notably-absent-from-the-top-10 Apollo Group (APOL). Apollo was previously their largest holding and also was their largest loser on the long side of the portfolio. They reduced the size of their position when APOL reported earnings back in April. They believe the stock has "begun to react to potential legislative changes more so than to fundamentals." As such, it is no longer in their top 10 holdings.

While Halvorsen & Viking had been bullish on APOL previously, there is always the other side of the trade. Back at the Ira Sohn investment conference, there were conflicting opinions on the for-profit education plays. The conference, which features hedge fund manager investment ideas, featured both Stephen Mandel of Lone Pine Capital and noted short seller Jim Chanos of Kynikos Associates. Mandel (like Halvorsen) liked the for-profit plays and specifically liked Strayer Education. Chanos, on the other hand, thought there were too many barriers going forward and he seems to have won that argument as Viking has conceded for now sinec the stock has traded on these legislative fears rather than fundamentals. (You can view all of the investment ideas at the hedge fund manager conference here).

By industry group, Information Technology was definitely the largest overall contributor to Viking's profits on the long side of the portfolio in the second quarter as they were net long to the tune of 11.5%. They were also net long Media to the tune of 9.1%. In terms of sector exposure, Viking was net long consumer discretionary at 10.6%. By geography, they were net long the US/Canada at 29%. Their portfolio weighting in North American names was at the high end of their historical range, at 72% of gross exposure. By market cap, they were net long large caps at 36.6%.

Short Positions

On the other side, their ten largest short positions were 12.2% of capital. One sector bet to take note of was their net short position in Capital Goods (Industrials sector) at -4%. They were also net short Banks at -6.8%. This is similar to what we saw from Chase Coleman's Tiger Global investor letter where despite the pain they had felt in financials, they still have conviction on the short side. Viking's largest loss on the short side came from a short in the financial sector. In terms of individual short positions, Viking's largest short represented -2.3% of capital.

For those of you interested in following the progression of Viking's portfolio and investment style, we'd also recommend checking out their 2008 year-end letter.

Firm Changes

In their most recent letter, Andreas then goes on to address various changes happening within the firm. Most notably, we see that Viking's CFO Carl Casler has left the firm to join a start-up hedge fund. Additionally, on the operational side of things, Viking has "concentrated our trading activity with our strongest brokerage relationships to improve trade execution cost, and we have moved a large portion of our trades (as much as 50% on some days) to their electronic venues to maintain anonymity." This highlights the increased importance of 'secrecy' in hedge fund land as firms desire to tip-toe around the markets without drawing attention to themselves. They have also selected Morgan Stanley Fund Services to administer their Global Equities and Global Equities III funds.


Viking saw 4.9% of capital redeemed in the second quarter of 2009 and continued to run the fund "cash neutral by seeking to replace redemptions with offsetting subscriptions during the period." The majority of redemptions have been investors trimming their positions and as such has caused Viking to approach the limited number of slots they have available for investors as they seek to replace these redemptions with new inflows. They are evaluating how to address this and may end up enforcing the $1 million minimum for accounts and then increasing the minimum for prospective investors.

Some interesting facts from Viking are that they paid commissions totaling $89.6 million over the past year (through June 30th). Additionally, their average commission of all trades was 13.9 basis points which leads to $16.7 million being paid to brokers. It's always interesting to sit down and aggregate just how much a fund spends on these sorts of things.

Overall, Viking shifted around their portfolio and introduced a lot of new positions. Their longs rallied with the market but their shorts rallied more than the market, causing them pain. Invesco is their top position and they are confident in the name going forward. Their previous top position in Apollo caused them pain and as such they have reduced the position size out of the top 10 holdings. To compare how their current portfolio stacks up against the quarter prior, view their previous holdings here as well as a prior investor letter here.

This is just one of the many recent hedge fund investor letters we've covered. Just last week, we covered Bill Ackman's Pershing Square investor letter as well as David Einhorn's Greenlight Capital investor letter. Stay tuned as we'll be covering numerous other hedge fund letters the rest of this week!

Those of you wishing to read Viking's latest letter can do so below via the embedded document. RSS & Email readers will have to come to the blog to view it. Alternatively, as long as this link works, you can try downloading the .pdf here.

Viking Q2 Letter

Paul Tudor Jones 1987 PBS Film 'Trader: The Documentary'

*Update: The link to the third party site hosting the video has been removed at the request of the copyright holder.

The 1987 PBS Film on Paul Tudor Jones entitled 'Trader: The Documentary'. This video has been extremely hard to find and those possessing a precious copy guard it with their life and/or sell it on eBay for hundreds if not thousands of dollars.

This is hedge fund manager & legend Paul Tudor Jones in his element. He is notorious for predicting and profiting from the stock market crash in 1987. The video takes you inside Tudor Investment Corp back when they were only 22 employees large and managing around $130 million. Today, obviously, they are much, much bigger. We cover Tudor Investment Corp here on the blog because of Tudor's excellent track record and legendary status. We've covered Tudor's recent equity portfolio, as well as good quotes from Paul Tudor Jones in the past. Lastly, we also posted up his hedge fund manager interview. This documentary is insider footage of what things were like at Tudor's firm during the build-up to some of the most interesting times in the stock market's history. Enjoy the videos!

Monday, July 27, 2009

Pershing Square Investor Letter

Last week we penned an update covering David Einhorn's Greenlight Capital letter. Additionally, we posted an update regarding Bill Ackman's portfolio as per the changes detailed in Pershing Square's latest investor letter. What's interesting is that in the letter, Bill says that they assume everything they say/write will become public knowledge and they treat it as such. So, he knows every investor letter and tidbit will spread into public sight, which forces him to be less specific than he might otherwise be when referring to positions or situations.

Below is the letter. Note that pages 2 and 3 are skewed sideways so you'll have to tilt your head unfortunately. The whole document is still readable though (9 pages in total). RSS & Email readers will have to come to the blog to view it. Those of you wishing to download the .pdf to print it off can hopefully still do so by clicking here (please let us know when/if this link stops working).

Pershing Square Q2 Letter