Friday, August 21, 2009

Alphaclone Hedge Fund Portfolios Rebalancing This Evening

Wanted to let everyone know that today Alphaclone is rebalancing all of the hedge fund clone portfolios to reflect the newest 13F filings that are out. This rebalance also affects our Market Folly custom portfolio. So, to see what new positions the current iteration of our clone holds, make sure to check Alphaclone this evening once the rebalance has taken place.

Also, we have exciting news in that we have just created a new version of our Market Folly custom portfolio and we'll be announcing the changes shortly. We have decided to replace/add hedge funds into the mix as we have inserted funds that are tracked more accurately because they are more focused on equities. Additionally, we are focusing now on a blend of old and new. It will include older, proven managers with some slightly newer managers that we believe are poised to succeed.

In essence, we view our custom hedge fund clone portfolio as if we were running a fund of funds, just without the absurd extra layer of fees. We have used our background and knowledge on various hedge funds and their strategies to select managers who have a history of solid stockpicking and who we feel can outperform over the long-term. Additionally, our familiarity with the caveats surrounding 13F filings has allowed us to select funds that are an ideal match for replicating a portfolio via SEC filings.

Check out Alphaclone this evening to see the rebalanced portfolios and check back here as we will soon unveil the newest iteration of our Market Folly Custom Portfolio!

Gold: The Ultimate Triple-A Asset, Says Sprott Asset Management

Thanks to a reader in Toronto for more great commentary out of Sprott Asset Management regarding their favorite precious metal. This firm has long liked gold so they're obviously talking their book here. However, we always enjoy reading their insight. We also recently posted up their July market update, their market commentary (highly recommended) and detailed their positions in UK markets.

RSS & Email readers will need to come to the blog to view the embedded document regarding Gold:

Gold the Ultimate Triple-A Asset

Alternatively, you can try to download the .pdf here if it will work.

What We're Reading 8/21/09

Market valuation as a backdrop [Abnormal Returns]

Interview with Michael Santoli of Barron's [Wall St. Cheat Sheet]

5 midget banks I'm watching [The Reformed Broker] - We highlight this because some big hedge funds that have picked up shares last quarter.

Optimism at highest level since November 2003 [Pragmatic Capitalist] - Well, isn't that just reassuring.

Investors lose by chasing top performing hedge fund strategies [Business Week]

Investors are getting back into hedge funds [Morningstar]

Thursday, August 20, 2009

Dan Loeb Buys Bank of America (BAC), Adds to Wyeth (WYE): 13F Filing

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

Next up in our series is Dan Loeb's event driven and value oriented hedge fund, Third Point LLC. Loeb started the firm in 1995 with $3.3 million in seed capital. Today, Third Point manages billions of dollars. Third Point has seen annual returns greater than 15% since inception all with a Sharpe Ratio of 0.9 and a correlation to the S&P 500 of 0.4. As of the end of June 2009, Third Point was up 7.2% for the year. Some of the changes to their portfolio below we have already covered when we wrote about Third Point's latest investor letter. In the letter, we learned that Loeb liked selective debt plays in the automotive sector. And, in the distressed arena in general, Loeb sees a lot of opportunities and feels like "a kid in a candy store." Third Point is a great fund to track for their insight and deep analytical research. To further your understanding about finance, markets, and investing, Dan Loeb has a great list of recommended books. For more on Loeb and Third Point, we'd highly recommend watching this video of a recent speech he gave. In his talk, Loeb details his background and walks us through how Third Point has handled the crisis.

The following were Third Point's long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. The last time we covered their portfolio, we saw that they liked 'blank check' acquisition type companies, so let's see what they like this time around. 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):
Bank of America (BAC), CF Industries (CF), Yahoo (YHOO), Sun Micro (JAVA), Allergan (AGN), Molson Coors (TAP), Hewlett Packard (HPQ), Apple (AAPL), Liberty Media (LMDIA), Lions Gate (LGF), Transatlantic Holdings (TRH), Anadarko Petroleum (APC), Qwest (Q), American International Group Preferred (AIG-PA), PepsiAmericas (PAS), Oracle (ORCL), and Pepsi Bottling Group (PBG).

Some Increased Positions (A few positions they already owned but added shares to)
Legg Mason (LMI): Increased posiiton by 1,380% (However, even with the big boost, the position is only 1% of their portfolio now)
Wyeth (WYE): Increased position by 17.8%

Some Reduced Positions (Some positions they sold some shares of)
Guaranty Financial (GFG): Reduced by 46%
Maguire Properties (MPG): Reduced by 17% (This figure is already out of date as we've already covered their recent additional sales of MPG).
PHH Corp (PHH): Reduced by 8.4%

Removed Positions (Positions they sold out of completely)
Victory Acquisition (VRY), Triplecrown Acquisition (TCW), Sapphire Industrials (FYR), Global Brands (GQN), Core Mark (CORE), Global Consumer (GMC), Amedisys (AMED), Hicks Acquisition (TOH), SPDR Gold Trust (GLD), Life Partners (LPHI), Lifetime Fitness (LTM)

Top 15 Holdings by percentage of long portfolio *(see note below regarding specifics)

  1. Wyeth (WYE): 15.86% of portfolio
  2. Bank of America (BAC): 9.74% of portfolio
  3. PHH Corp (PHH): 9.04% of portfolio
  4. CF Industries (CF): 7% of portfolio
  5. Liberty Acquisition Holdings (LIA): 6.95% of portfolio
  6. Yahoo (YHOO): 5.2% of portfolio
  7. Sun Microsystems (JAVA): 4.35% of portfolio
  8. Trian Acquisition (TUX): 2.92% of portfolio
  9. Pfizer (PFE): 2.72% of portfolio
  10. Allergan (AGN): 2.64% of portfolio
  11. Molson Coors (TAP): 2.58% of portfolio
  12. Hewlett Packard (HPQ): 2.57% of portfolio
  13. Schering Plough 6% (SGP-B): 2.51% of portfolio
  14. Depomed (DEPO): 2.45% of portfolio
  15. Apple (AAPL): 2.37% of portfolio

More than anything, Third Point was out making purchases as they bought new positions in Bank of America (BAC), CF Industries (CF), Yahoo (YHOO), and Sun Microsystems (JAVA) and brought them all up to top 10 positions in their long US equity portfolio. They also boosted their pre-existing Wyeth (WYE) stake by over 17%. Keep in mind that with WYE they are playing the risk arbitrage here and they put on the trade at an over 20% spread. His entrance into CF Industries intrigued us as well, as we have previously seen numerous hedge funds involved in various agricultural plays.

Loeb also has jumped in the Bank of America (BAC) play with a brand new position just like fellow hedge fund manager John Paulson did as well. In fact, a large amount of hedge funds we cover entered the BAC trade but we'll have more on that in the coming days. Loeb already told us about the BAC play in his latest investor letter. In it, he tells us that he built up a position in preferred shares at 57 cents on the dollar and then swapped them for common stock worth $10 a share. He says they have continued to build their BAC position as they see normalized earnings power of ~$3/share.

When we last covered their portfolio, we noticed their propensity to invest in 'blank check' shell acquisition type companies. This time around, they've sold out of a lot of them but still hold Liberty Acquisition and Trian Acquisition.

That about wraps up Loeb's portfolio. Make sure you definitely check out Dan Loeb's recommended investing books, as these picks come straight from the hedge fund manager himself. Again, we also want to reiterate that tracking managers through 13F's is great and all, but you really need to examine every resource you can. While Loeb's 13F reveals his equity plays, you have to turn to his investor letter to hear about their plays in automotive industry debt and distressed mortgages, not to mention their foreign holdings.

*Note regarding portfolio percentages: Assets from the collective holdings reported to the SEC via 13F filing were $901 million this quarter compared to $516 million last quarter, so definitely a sizable increase in assets invested long in US equities. Please keep in mind that when we state "% of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Third Point manages billions of dollars and the percentages are in reality more watered down in their actual hedge fund portfolio. For instance, the positions above were divided by the $901 million reported in the 13F. If you were to calculate percentage weightings in the actual hedge fund portfolio, they would obviously be different since you would divide position sizes by their total assets under management (in the billions).

This is just one of the 40+ prominent funds that we'll be covering in our Q2 2009 hedge fund portfolio series. So far, we've already covered the holdings of Bill Ackman's Pershing Square Capital Management, David Einhorn's Greenlight Capital, and Seth Klarman's Baupost Group. Check back each day as we cover prominent hedge fund portfolios.

Ken Griffin's Citadel Selling E*Trade (ETFC) Shares

Ken Griffin's Citadel Investment Group had recently announced that they would be selling up to 66.6% of their equity position in E*Trade Financial (ETFC). They will sell 120 million shares out of their current 166 million share position and it will be conducted through a stock trading plan registered with the SEC. Once Citadel is done selling in October (they won't sell below the price of $1.20 a share), they will be left with a 4% ownership stake. So far, the have already sold around 14 million shares. What is also interesting is that this move comes right after hedge fund Coatue Management disclosed a 5% ownership stake in ETFC. Citadel also holds debt of ETFC and plans to continue to hold that since Ken Griffin is now on E*Trade's board. You can read Citadel's press release in full here.

Additionally, we learn that Citadel had potentially struck a deal with E*Trade where Ken Griffin's shop would route 97.5% of Nasdaq stock and options trades customers place on E*Trade through Citadel's market-making setup. In the current incarnation, Citadel receives 40% of those orders. The proposed new deal would be exclusive for 6 years and Citadel would pay $100 million up front. HOWEVER, the deal is subject to E*Trade's regulator, the Office of Thrift Supervision (OTS). And, since these developments were first released, the OTS has just "suspended consideration of the application." So, we'll have to wait it out to see how the rest of this unfolds. Undoubtedly, concerns regarding high frequency trading (HFT) come to mind here and OTS wants to examine this deal more closely. We'll keep everyone posted regarding the developments.

Wednesday, August 19, 2009

Seth Klarman's Baupost Group Loves Capitalsource (CSE): 13F Filing

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

The third fund in our series is Seth Klarman's Baupost Group. Klarman started working for them at age 25 after receiving his Harvard MBA and now runs the show. This solid value focused firm has seen an annual compounded return of 20% and their long-term timeframe and focus on equities makes them ideal for tracking and cloning. In fact, they are one of the few funds selected to be included in our MarketFolly custom portfolio that is seeing 25.8% annualized returns. Baupost as a hedge fund was recently ranked 13th overall in Alpha's 2009 hedge fund rankings. We highly recommend reading up on Klarman and his investment methodology. He has detailed his investment process in a now out of print book, Margin of Safety where he provides a "how-to" on risk-averse value investing.

Baupost has been pretty active prior to the 13F with other SEC filings and we've been right there to cover them all. Most recently, they sold completely out of PDL Biopharma (PDLI). They also sold out of their Omnova (OMN) position. Back in May, we also saw that Baupost went activist on Breitburn Energy Partners (BBEP) with a 13D filing. The shares are also reflected below in the 13F filing.

We've covered Baupost in-depth on the blog and have assembled quite a list of resources including:

- Klarman's interview from the annual Graham & Dodd breakfast

- Recent thoughts from Seth Klarman

- An interview with Seth Klarman

Definitely check those out if you are interested in reading more about Baupost and their activity. Unfortunately though, they are currently closed to new investors.

The following were Baupost's long equity, note, and options holdings as of June 30th, 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):

Some Increased Positions (A few positions they already owned but added shares to)
Alliance One (AOI): Increased by 43%

Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)
Domtar (UFS): Reduced by 4% (Thanks to a reader for pointing out that UFS underwent a 1/12 reverse split and after that transaction they only sold some of their shares).
News Corp (NWS): Reduced by 92%
PDL Biopharma (PDLI): Reduced by 18% (Note this information is already dated, Baupost sold completely out of their position recently)
Horizon Lines (HRZ): Reduced by 18.6%
News Corp (NWS-A): Reduced by 10%

Removed Positions (Positions they sold out of completely)
Exterran (EXH)
Linn Energy (LINE)
Omnova Solutions (OMN) - we covered their sales of OMN a few weeks ago
All the rest of their sales were positions that were less than 0.2% of their portfolio each: Acergy (ACGY), GHL Acquisition (GHQ), Prepaid Legal (PPD), Borders Group (BGP), Columbus Acquisition (BUS-WS), Media & Entertainment Holdings (TVH-WS), MBF Healthcare (MBH-WS)

Top 15 Holdings (by % of portfolio)

  1. News Corporation (NWSA): 17.8% of portfolio
  2. Capitalsource (CSE): 11.55% of portfolio
  3. Capitalsource (CSE) Bonds: 10.71% of portfolio
  4. Theravance (THRX): 10.5% of portfolio
  5. Liberty Media (LMDIA): 8.95% of portfolio
  6. PDL Biopharma (PDLI): 7.94% of portfolio as reported on the 13F. However, they recently filed an amended 13G and sold completely out of PDLI.
  7. Breitburn Energy Partners (BBEP): 5.18% of portfolio
  8. Domtar (UFS): 4.25% of portfolio
  9. Facet Biotech (FACT): 3.23% of portfolio - note that Baupost filed an amended 13D in late April and has gone activist with their investment
  10. Capitalsource (CSE) Bonds (2nd set): 2.7% of portfolio
  11. Alliance One (AOI): 2.66% of portfolio
  12. Viasat (VSAT): 2.5% of portfolio
  13. Theravance (THRX) Bonds: 2.4% of portfolio
  14. iStar Financial (SFI-F) Preferred F Bond: 2.04% of portfolio
  15. Syneron Medical (ELOS): 1.77% of portfolio

Since the 13F reports positions Baupost held as of June 30th, 2009, PDL Biopharma is included in the filing. However, in a more up-to-date filing, we see that Baupost has sold completely out of PDLI. This just goes to show that you have to track all the documents filed by a hedge fund, not just the 13F.

Capitalsource remains a massive position for Klarman as he holds common stock and 2 sets of bond positions. In total, his Capitalsource position represents 24.96% of his portfolio. This brings us to another caveat: when we say 'portfolio' when discussing 13F filings, we merely mean the amount of assets reported directly on the 13F filing. Since 13F's do not include short positions, cash, or holdings in other markets, a given hedge fund's actual assets under management are almost always larger than what is defined on the 13F. So, take these percentage weightings with a slight grain of salt as they are based on a percentage of overall long US equity, options, and note exposure. In reality, the portfolio weightings are a little bit more watered down than what our calculations show if you were to base it off total assets under management. So, just keep that in mind.

Klarman's Baupost has notoriously had a lot of cash on the sidelines as they wait to deploy it when they see compelling opportunities. And, throughout the crisis they've begun to put cash to work and we've seen some of that activity unfold. The only real addition this time around was Baupost's purchase of some more Alliance One (AOI) shares. The vast majority of Baupost's portfolio remained flat and this is exactly why we track them. They are focused value players that assemble positions with the aim of holding them longer term. This makes their portfolio easier to track and is why we have included them in our custom MarketFolly portfolio that is seeing 28.5% annualized returns. Their low turnover means easier and more accurate cloning.

One move we saw that was interesting was their sale of most of their News Corp 'B' shares (NWS). While they still sold 10% of their 'A' shares (NWSA) position, they definitely dumped a lot more of their NWS holding. We just thought that was intriguing and worth noting.

Lastly, we also want to touch on a move that is not reflected in the 13F filing but happened very recently. In late July it was revealed that Baupost has provided financing to CIT Group (CIT) along with numerous other hedge funds and firms. Supposedly, the loan is backed by $30 billion worth of assets. You can read the specifics of the deal in our hedge fund news update.

Assets from the collective holdings reported to the SEC via 13F filing were $1.2 billion this quarter compared to $1.1 billion last quarter, so just a slight uptick. This is just one of the 40+ prominent funds that we'll be covering in our Q2 2009 hedge fund portfolio series. So far, we've already covered the holdings of Bill Ackman's Pershing Square Capital Management and David Einhorn's Greenlight Capital. Check back each day as we cover prominent hedge fund portfolios.

Hedge Funds: Best & Worst Performers Of 2009

Came across interesting lists of the best and worst performing hedge funds thus far in 2009 over on Dealscape and thought we would post some of them up. Firstly, let's touch on where hedge funds overall stand this year. After a tepid June for the markets, July ramped up with a 7.56% gain in the S&P 500. Turning to hedge fund strategies, we see the following performance figures for the month of July:

Convertible Arbitrage: +6.56% (now up 36.6% for the year)
Distressed Securities: +3.39%
CTA Global: -0.19%
Emerging Market: +4.39% (now up 25.8% over the past 5 months)
Equity Market Neutral: +0.27%
Event Driven: +3.39%
Long/Short Equity: +2.85%
Fund of Funds: +1.51%

Now that the recent month's metrics are out of the way, let's turn our focus to the best and worst performing funds out there in hedge fund land. Here are some of the worst performing hedge funds of 2009:

Horseman Global : -21.92%
Ursa Offshore: -17.42%
Man AHL Diversified: -12.64%
Cantillon World (Class A): -10.87% (we covered the fact that Cantillon is closing down/turning into a long only shop)
Renaissance Technologies' RIEF LP B: -10.01% (Jim Simons & Rentec's underperformance has been well documented nicely by Dealbreaker here. Also, for those of you looking for insight from the notoriously private manager, check out this lengthy interview here).
Winton Evolution Fund: -9.52%

And here are some of the best performing hedge funds of 2009:

Turnberry Capital: 92.31% (Thanks to a reader for pointing out that Turnberry recently announced they would be shutting down due to heavy redemption requests and have already sold off 70% of their credit derivative portfolio).
Henderson European ABS Return: 78.94%
Palamino Fund (Class B): 66.9%
Pentwater Event Fund (Class A): 59.64%
Pharo Master Fund: 50.60%
Redwood Capital: 45.16%

Make sure to check out the full list of the best performing funds here and the worst performing funds here courtesy of Dealscape.

Tuesday, August 18, 2009

David Einhorn's Greenlight Capital Loads Up On S&P500 Puts (13F Filing)

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

The second hedge fund in our series is David Einhorn's Greenlight Capital. This $6 billion hedge fund has a value investing bent with a focus on spin-offs. For whatever reason, Einhorn seems to always appear in the media for his short positions. He of course had a well documented short position in Lehman Brothers back before it collapsed. More recently, he also was caught in the Volkswagen short squeeze that blindsided numerous hedge funds as he detailed in one of his investor letters. Einhorn has also detailed the saga between his fund and Allied Capital, another company he shorted, in his book Fooling Some of the People All of the Time: A Long Short Story. This book is great because it gives you an inside perspective as to how Greenlight constructs and researches their investment theses and we highly recommend it. Greenlight approaches things by identifying mispricings in the markets and going from there. They have seen solid annual returns of over 20% and are a great fund to track. While the information below will track Einhorn's US equity, note, and bond positions, we also highly recommend reading their latest investor letter as it gives you further insight into Greenlight's portfolio.

The following were their long equity, note, and options holdings as of June 30th, 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):
SPDR S&P500 (SPY) Puts
Cardinal Health (CAH)
General Electric (GE) Puts
Transatlantic Holdings (TRH)
ATP Oil & Gas (ATPG) - position is less than 0.45% of their overall portfolio
Endurance Specialty Holdings (ENH) - position is less than 0.30% of their overall portfolio
US Natural Gas Fund (UNG) - position is less than 0.02% of their overall portfolio

Some Increased Positions (A few positions they already owned but added shares to)
Everest Re (RE): Increased position by 598%
IPC Holdings (IPCR): Increased position by 132%
Pfizer (PFE): Increased position by 102%
Wyeth (WYE): Increased position by 100%
Aspen Insurance (AHL): Increased position by 74%

Some Reduced Positions (Some positions they sold some shares of)
MEMC Electronics (WFR): Reduced by 50%
EMC (EMC): Reduced by 44%
Echostar Corporation (SATS): Reduced by 37%
Helix Energy (HLX): Reduced by 34%
Harman International (HAR): Reduced by 31%
URS (URS): Reduced by 28%

Removed Positions (Positions they sold out of completely)
SPDR Gold Trust (GLD)* (there is a big asterisk next to this one, so read our summary below to find out why). Target (TGT), Hess (HES), Commscope (CTV), Dow Chemical (DOW), Conway (CNW), Rohm & Haas (ROH), Discover Financial (DFS), Jones Apparel (JNY), Western Digital (WDC), American Eagle Outfitters (AEO), Patriot Coal (PCX), Cadence Design (CDNS), Williams Sonoma (WSM), JA Solar (JASO), Focus Media (FMCN), Carpenter (CRS), Corning (GLW), Supervalu (SVU), Sunstone Hotel (SHO), Bradywine Realty Trust (BDN)

Top 15 Holdings (by % of portfolio)

  1. SPDR S&P500 (SPY) Puts: 24.25% of portfolio
  2. Pfizer (PFE): 6.32% of portfolio
  3. URS (URS): 5.56% of portfolio
  4. Teradata (TDC): 5.11% of portfolio
  5. Wyeth (WYE): 4.56% of portfolio
  6. Cardinal Health (CAH): 4.27% of portfolio
  7. Market Vectors Gold Miners (GDX): 4.25% of portfolio
  8. Allegheny Energy (AYE): 3.75% of portfolio
  9. EMC (EMC): 3.34% of portfolio
  10. Einstein Noah (BAGL): 3.27% of portfolio
  11. Aspen Insurance (AHL): 3.25% of portfolio
  12. Health Management Associates (HMA): 2.49% of portfolio
  13. McDermott (MDR): 2.33% of portfolio
  14. MEMC Electronic (WFR): 2.29% of portfolio
  15. IPC Holdings (IPCR): 1.77% of portfolio

We've got a lot of technicalities to cover here so let's dive right in. Firstly, Einhorn did not get out of gold. Last go-round, we saw Greenlight had amassed a large gold position via the SPDR Gold Trust (GLD). Although GLD no longer is being reported on his 13F filing (they sold out of it), they still own a large gold position. They have started storing physical gold due to cost savings as noted when we looked at Greenlight's recent investor letter. This is the perfect example of why you can't blindly follow SEC filings. You've got to know a manager's rationale and access every resource of theirs you can. And, Market Folly's goal is to bridge that gap with our hedge fund tracking. Through tracking him, we know that Einhorn has been decisively skeptical. If he was so skeptical, then why would he sell out of his gold position on the 13F? The answer: he didn't sell out of it at all, he merely switched investment vehicles. Those following 13F's blindly would not know that. For instance, if we were just 'piggybacking' Einhorn into his gold play last quarter, we would have sold out just now because we no longer see his gold position appear on the 13F. When in reality, he still holds a very large gold position.

Another thing worth noting here is that Einhorn holds numerous securities in international markets. As such, his 'top holding' listed on the 13F filing will not be his top holding in his hedge fund's overall portfolio. Since 13F filings only require institutions to disclose holdings in US markets, we are shielded from viewing the rest of the portfolio. However, by reading Einhorn's letter, you can see what his top holdings are in international markets (and the overall portfolio). So, that's more of a caveat with this summary than anything.

Turning to his 13F activity, we can easily see the main headline here: they loaded up on S&P put options as a brand new position. In his investor letter, we learned that a drop in volatility decreased prices in options markets and it made sense for Greenlight to purchase them given the price. This move further illustrates Greenlight's bearish stance on the economy and at the very least provides some downside protection.

We also want to point out the fact that in reality the puts position is not 25% of their portfolio. That figure was derived by taking the stated value of the puts on the 13F and dividing it by the stated value of their total assets reported on the 13F. The total assets reported was $2.8 billion and that total represents their long US equity, options, and note positions. This does not include their short positions, cash, or holdings in other markets. Their firm in reality manages $5-6 billion and so the percentage of portfolio dedicated to S&P puts is realistically lower. Additionally, the value of the put options on the 13F filing represents the notional amount of the shares underlying his puts. Hopefully that clarifies some.

Additionally, we make note of Greenlight's new position in Cardinal Health that they brought all the way up to their 6th largest holding. Notable sales include selling up to 50% of both their MEMC Electronics and EMC positions. This is slightly interesting since we see that fellow hedge fund manager Bill Ackman has a large EMC position. Einhorn sold completely out of his Target position too (another position Ackman has a large stake in). Wonder if Einhorn has beef with Ackman since he is selling out of all those positions. (We're only joking).

In terms of positions they already owned, we see that Greenlight doubled down on their Pfizer (PFE) and Wyeth (WYE) stakes. They boosted their Everest Re (RE) stake substantially, but it still is only 1.58% of their overall portfolio now.

Assets from the collective holdings reported to the SEC via 13F filing were $2.8 billion this quarter compared to $2.4 billion last quarter, so a slight increase. US equity exposure. This is just one of the 40+ prominent funds that we'll be covering in our Q2 2009 hedge fund portfolio series. So far, we've already covered the holdings of Bill Ackman's Pershing Square Capital Management. Check back each day as we cover prominent hedge fund portfolios.

Credit Card Delinquencies & Charge Offs Hit All-Time High

This is a story that has been brewing for a while and we've tried to cover it when we're not tracking hedge fund portfolios. So far in 2009, the data surrounding credit card charge offs and mortgage delinquencies has not been pretty... at all. Just now after the close of the second quarter, we see that both metrics have hit the highest rates since the Federal Reserve began tracking them.

Credit card delinquencies (payments more than 30 days late) rose to 6.7% up from 6.68%. Charge-offs (listed as 'uncollectable' by the banks) rose to 9.55%, up from 7.64%. The scary thing here is that this trend is accelerating (as illustrated by the graph below, courtesy of

(click to enlarge)

An acceleration in charge-offs and delinquencies obviously means bad things for financial institutions and the economy in general. Much like the impending (and already current) problems in commercial real estate, we've likened credit card charge-offs as a 'second wave' in this economic crisis. The first tidal wave came through and washed out a whole lot in the economy. As people begin to lose work and fall behind on their massive debt repayments, they drown. This creates a second wave of writedowns for financial institutions and another set of problems for an economy trying desperately to recover. The initial tidal wave hits and knocks America down. Then, when America starts to get enough strength to stand up, they will be washed away again with a whole new slew of problems.

This is due to the delayed effect the first wave had on the consumer. After people are laid off, they scramble to find new jobs and dwindle what little savings they have left. (Remember, America's savings rate has not been the best and we've concluded that it needs to rise in order to help get out of this mess). And, the fact that the unemployment rate keeps rising is not helping things either. Once their savings is gone, they rely on credit cards as a flotation device. And, this scenario is only the people who don't already have credit card debt. Those already suffering under this burden begin to bear an even heavier load until they simply can't make payments at all. This effectual lag has slowly but steadily been building for months and the latest charge-off and delinquency data has begun to spike. In fact, we started posting about rising delinquencies back in August of 2008 when we saw delinquency rates starting to near 5%. We then touched on the impending credit card squeeze back in November as well, as we began to look at things in-depth. Nowadays, charge-offs are nearing 7% and in the span of one year we've seen a surge in credit card delinquencies of almost 2%. This just begins to show the lagging effect this phenomenon will have.

So, this is nothing new. Charge-offs and delinquencies are accelerating and even the CEO of JPMorgan Jamie Dimon himself says that consumer loans and credit cards will be a house of pain for financial institutions. Well, he should know since his firm is in the eye of the rising storm. As such, we penned a piece announcing our downgrade of the American consumer's credit rating where we examined the potential impact of credit line reductions.

The main thing to take away here is that credit card charge-offs and delinquencies are getting pretty bad and have the potential to go to 'worse.' The lagging effect of these charge-offs and delinquencies cannot be overstated as these problems slowly fester. Too many consumers have been struggling and now find themselves caught in the undertow; the wave has been building for some time now. The only questions now are how big will it get and when will it crash down?

Monday, August 17, 2009

Pershing Square: New Positions In McDonalds (MCD) & Automatic Data Processing (ADP) ~ 13F Filing

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

The first hedge fund in our 2nd quarter 13F series is Bill Ackman's Pershing Square Capital Management. Bill is a well known value and activist player who founded Pershing after his previous firm Gotham Partners broke up. Most recently, he has been well known for his foray into shares of Target (TGT) in an attempt to unlock value and spur change at the company. While he is committed to the company long-term, he just recently trimmed his Target position (as per an amended 13D filing with the SEC). We follow Ackman & Pershing because they run a highly concentrated portfolio that is ideal for portfolio tracking purposes. For more information, check out our in-depth profile on Ackman and Pershing Square.

In our first quarter 2009 update regarding Pershing Square, we noted in their 13F filing that they had amassed a large position in EMC (EMC). Let's see what they were up to this time around. The following were their long equity, note, and options holdings as of June 30th, 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):
Automatic Data Processing (ADP)
McDonalds (MCD)

Some Increased Positions (positions they already owned but added shares to)
EMC (EMC): Increased position by by 0.1%

Some Reduced Positions
Target (TGT): On this position, the 13F has different data, but we are ignoring that because Pershing recently filed an amended 13D which updates their TGT stake as of a much more recent date. In the filing, we see that they have reduced their overall exposure from 7.8% ownership in the company to 4.4% ownership. You can read about the specifics of the transactions in our post on Target.

Removed Positions (Positions they sold out of completely)
Alexanders (ALX)
Apartment Investment & Management (AIV)
Visa (V)
Wendys Arbys (WEN)
Yum Brands (YUM)

Flat Positions (Positions with no change since the last filing)
Greenlight Capital Re (GLRE)
Borders Group (BGP): Average price of their position is $6.98 per share (as detailed in Pershing's investor letter)

Entire Portfolio (by % of portfolio)

  1. Target (TGT): 43.28% of portfolio - calculated only using their common shares position (to help reflect the fact that they've sold out of a lot of their options positions just recently).
  2. EMC (EMC): 33.89% of portfolio
  3. Automatic Data Processing (ADP): 11.34% of portfolio
  4. McDonald's (MCD): 6.08% of portfolio
  5. Borders Group (BGP): 1.72% of portfolio
  6. Greenlight Capital Re (GLRE): 0.19% of portfolio

Okay, so before everyone freaks out: Ackman did not sell General Growth Properties (GGWPQ). It is simply not listed because the SEC has deemed GGWPQ to no longer be a reportable security (thanks KP for the link) for 13F filings. We would guess that this is possibly due to the fact that they are no longer listed on the exchange (GGWPQ is traded in OTC markets now). The main thing to take away from this though is the fact that we will still see Ackman's moves in GGWPQ through Form 4 filings since he is now on the board of directors. So, all of you GGWPQ bandwagoneers can still sleep at night. Ackman touched on his position in General Growth in one of his recent investor letters. Additionally, you can view Pershing Square's GGWPQ presentation from the Ira Sohn investment conference (where numerous hedge fund managers presented investment ideas).

The other major moves in Ackman's portfolio can be summarized as such: He added McDonald's and Automatic Data Processing as brand new positions. At the same time, he sold completely out of a number of positions, including: Alexanders, Apartment Investment & Management, Visa, Wendys Arby's, and Yum Brands (many of which he had just picked up a few quarters ago). It looks as if Ackman is making a straight swap in fast food land, favoring McDonald's over his previous holdings. That really sums it up, as Pershing runs a pretty concentrated portfolio. For more on them, make sure to check out our profile on Ackman and Pershing Square.

Assets from the collective holdings reported to the SEC via 13F filing were $2.2 billion this quarter compared to $1.9 billion last quarter, so a slight tick up. This is just one of the 40+ prominent funds that we'll be covering in our Q2 2009 hedge fund portfolio series. Check back each day as we cover prominent hedge funds.

Hedge Fund Portfolio Tracking: Second Quarter 2009 Edition

It's baaaaack. This post is the preface to the series we will be doing in the coming weeks that details what many prominent hedge funds have been up to in the second quarter of 2009 as per their 13F filing.

Four times a year (once each quarter), hedge funds & asset managers with greater than $100 million AUM (assets under management) are required to report to the SEC their long holdings from the previous quarter. These filings do not show the funds' short positions and require them to disclose their long holdings in equity markets. Additionally, they are required to file various puts or calls purchased in the options market as well as notes & bonds. These filings do not cover commodities, currencies, or other markets. So, we just wanted to clarify that for people new to 13F filings.

We check these 13F filings quarterly just to get a sense as to where these funds are putting their money. If you just sit down and do some simple number crunching between this quarter's 13F and the one prior, you can see exactly what everyone has been up to. And, if you create a cloned portfolio based on these top hedge fund holdings, you can see 28.5% annualized returns like our custom Market Folly portfolio created with Alphaclone.

Please note that these 13F's should be treated as a lagging indicator simply because the 13F's that are being released currently (August 12th-21st 2009) show the funds' portfolio holdings as of June 30th, 2009. So, in the past month and a half, they could have completely changed their portfolio. But, at the same time, its easy to see which sectors they are flocking to and what their concentrated positions are.

We like to specifically follow equity focused hedge funds as they are the easiest to track. We focus on value based (or growth-at-a-reasonable-price) hedge funds in the hope that they won't experience ridiculously high turnover and thus allow us to somewhat track their movements as they build up concentrated positions. Specifically, we follow the 'Tiger Cubs' (otherwise known as the proteges of former hedge fund Tiger Management legend Julian Robertson). Many of these former proteges/right-hand men have started their own funds and here are the ones we've been following.

- John Griffin's Blue Ridge Capital - portfolio updated
- Stephen Mandel's Lone Pine Capital - portfolio updated
- Lee Ainslie's Maverick Capital - portfolio updated
- Andreas Halvorsen's Viking Global
- Chase Coleman's Tiger Global
- Touradji Capital (Paul Touradji)
- Shumway Capital Partners (Chris Shumway)

Additionally, we also like to follow the Commodities Corporation "offspring" which have gone off to start their own funds and typically employ a global macro strategy. We don't track them for their equity portfolios per se, but we like to see what sectors they might be flocking to and whether or not they have a large amount of assets allocated to US equities.

- Tudor Investment Corp (Paul Tudor Jones)
- Moore Capital Management (Louis Bacon)
- Caxton Associates (Bruce Kovner)

Additionally, we like to follow other well known investment gurus. These include:

- Warren Buffett
- Carl Icahn
- George Soros (portfolio updated)

Next, there is an assortment of funds that employ various strategies ranging from activist to global macro and often run concentrated portfolios. We track some of these funds due to their solid returns over the years, while we track others due to the spotlight that has been cast on them during the crisis.

- Timothy Barakett's Atticus Capital (recently announced they are shutting down their main fund)
- Bret Barakett's Tremblant Capital
- Peter Thiel's Clarium Capital
- Art Samberg's Pequot Capital (recently announced closure)
- Philip Falcone's Harbinger Capital Partners - portfolio updated
- Boone Pickens' BP Capital
- John Paulson's Paulson & Co
- Barry Rosenstein's Jana Partners
- Eric Mindich's Eton Park Capital - portfolio updated
- Farallon Capital Management (Thomas Steyer)
- Raj Rajaratnam's Galleon Group
- Ken Griffin's Citadel Investment Group
- Jeffrey Gendell's Tontine Associates

A few deep value & activist funds:

- Seth Klarman's Baupost Group - portfolio updated
- David Einhorn's Greenlight Capital - portfolio updated
- Dan Loeb's Third Point LLC - portfolio updated
- Bill Ackman's Pershing Square Capital Management - portfolio updated

For our readers, we also track some quant and highly active trading funds. We do not track these firms to gain insight for portfolio investing ideas. Instead, it's merely for fun because for whatever reason, people like to see what they are doing. It's basically useless to track them due to their quant or high frequency trading nature and none of us could really tell you the rhyme or reason behind any one of their positions.

- Jim Simons' Renaissance Technologies
- Steven Cohen's SAC Capital
- David Shaw's D.E. Shaw & Co.

We also track some managers who previously worked at funds mentioned throughout the list above, but now have struck out on their own. As they were some of the brains behind the solid returns of some funds listed above, we feel it's only appropriate to track them now.

- David Stemerman's Conatus Capital (ex-Lone Pine) - portfolio updated
- Anand Parekh's Alyeska Investment Group (ex-Citadel)
- James Pallotta's Raptor Capital Management (on hiatus for now, ex-Tudor)

We've also just recently started to track another set of funds due to high demand from our readers. While Market Folly is a team of 1, we'll try our best to crank out as much hedge fund content as we can.

- Passport Capital (John Burbank)
- Sprott Asset Management (Eric Sprott)
- Balyasny Asset Management (Dmitry Balyasny)
- Hilltop Park Fund (Stanley Shopkorn, ex-Moore)
- White Elm (Matthew Iorio, ex Lone Pine)
- Highside Capital (Lee Hobson, ex-Maverick)

Over the coming weeks we'll touch on some of the important position moves these funds and market gurus have made. Our hedge fund coverage now spans well over 40+ funds. If you would like to see a specific hedge fund covered here on, post up a comment in the comments section below. We're always looking to add more funds that readers would like to see, so please drop in your suggestions.

Last, but not least, we're always looking for people to help us cover these hedge funds, as it gets to be a bit tedious (this is a one-man show here). If you're interested in helping out posting up 13F information or have resources worth sharing, please get in contact with us at the top of the site. The hedge fund tracking series second quarter 2009 edition starts today, so spread the word and check back daily.

Up first today: Bill Ackman's Pershing Square Capital Management (coming in a separate post).

The Basics Of High Frequency Trading (HFT)

Great video flagged by Zero Hedge last week regarding the basics of high frequency trading (HFT). There has been a whooole lot of talk about this lately on other sites and in the world of finance. So, this video embedded below serves as a great primer for those of you interested in the subject. (RSS & Email readers will need to come to the blog to view the video).

For those of you who would like the latest opinion swirling around the investment blogosphere, Abnormal Returns has a nice post and round-up.

Top 10 Trading & Investing Blogs: Market Folly Recognized

Hey everyone, we just wanted to take a second and highlight the fact that Market Folly has graced the list of the "Top 10 Trading and Investing Blogs" over on Stephen Vita of Alchemy Of Trading LLC compiled the list and we have to say we are genuinely honored to be included amongst some other exceptional blogs. Head over to the list to check out some other great reads worth checking out. Again, our thanks to Stephen and for the inclusion, as we are truly honored!