Friday, January 15, 2010

Certified Hedge Fund Professional (CHP) Program Now Open: Discount For Readers

We're excited to announce that Market Folly readers will receive an exclusive $50 discount to the Certified Hedge Fund Professional (CHP) Program now that it is open again. Sign up fast as there are only 300 slots for this session and they only open registration twice a year. In order to receive the discount, enter your email address in the form at the bottom of this page. Once you get an email, just mention Market Folly and you'll receive an exclusive discount.

Here's some more information about the program: The CHP Designation is the #1 globally recognized 100% online hedge fund training and certification program constructed by and for hedge fund professionals. There are two levels: CHP Level 1 covers hedge fund fundamentals while CHP Level 2 allows you to specialize in an area of your choice such as: due diligence, portfolio analytics, marketing & sales, etc.

Within the program, you'll gain understanding of hedge fund strategies, fund of hedge funds, analytics, due diligence, hedge fund trends and more. You'll have access to over 60 educational videos, templates, books, and hedge fund tools. Not to mention, this is a huge networking opportunity as there are a ton of hedge fund professionals already in the program. Their goal is to provide you with niche training so that you can advance your career in the hedge fund industry. So far, there are over 70 testimonials for the program.

Remember, there are only 300 slots available this time around. Enter your email address below to receive more information & the exclusive discount for our readers. Just mention Market Folly when you register:

(RSS & Email readers come to the site to sign-up for the discount).

Philip Falcone's Harbinger Capital Continues Calpine (CPN) Sales

Philip Falcone's hedge fund firm Harbinger Capital Partners has been quite busy as of late. In particular, they've been unloading Calpine shares (CPN). This time is no different as they sold even more shares just a few days ago. Per an amended 13D filing with the SEC, Harbinger Capital Partners is now showing a 6.78% ownership stake in Calpine with 30,000,000 shares remaining. Breaking it down, we see that 20 million of those shares are held in their Master Fund and 10 million are held in their Special Situations Fund. Harbinger had a great showing last year as they finished 2009 up 46.5% as we saw in our 2009 hedge fund performance numbers post. So, all their portfolio shuffling apparently has been for good reason.

While we were aware of their previous sales, we now see that Falcone's hedge fund sold over 14 million shares on the 12th of January at a price of $11.75. Below is a sceenshot taken directly from their SEC filing that details their sales of CPN over the past few months:

(click to enlarge)

So, the theme of reducing their position size in this name continues. In terms of other portfolio movement, we also reported on Harbinger's three new positions so make sure you check those out as well. Harbinger is a multi-billion dollar hedge fund ran by Philip Falcone that primarily focuses on distressed plays and special situations.

For a complete timeline of Harbinger's moves with their Calpine stake, you'll see that they recently sold shares, having previously reduced their position in December. Prior to that, they were selling even more CPN shares and executed an offering back in September. Whew. We'll have to see if this trend continues, but our guess is that they're trying to reduce their position size to a smaller allocation in their overall portfolio.

Taken from Google Finance, Calpine is "an independent wholesale power generation company engaged in the ownership and operation of natural gas-fired and geothermal power plants in North America. The Company sells wholesale power, steam, capacity, renewable energy credits and ancillary services to its customers, including industrial companies, retail power providers, utilities, municipalities, independent electric system operators, marketers and others."

What We're Reading ~ 1/15/09

Lots of good links this week so a longer list than usual:

Interview with Seth Klarman [Harvard Business School]

Frontline: The Credit Card Game [Value Plays]

The Predictioneer's Game ~ a book review [Distressed Debt Investing]

Is Berkshire Hathaway undervalued? [Street Capitalist]

Why you can't invest like Warren Buffett [Money Game]

The 200 best blogs and resources for business students, we're honored to be included [OnlineCollegesAndUniversities]

Interview with Justin Fox on the myth of the rational market [Simoleon Sense]

The myth of 2009's great consumer deleveraging [Atlantic]

Investor expectations for interest rates have been wrong [Bloomberg]

Hedge fund strategies in mutual funds [NY Times]

Commercial real-estate: a slow motion wreck [Time]

Appaloosa's David Tepper turns panic to profits with $6.5 billion hedge fund gain [BusinessWeek]

Nine stock ideas from the leading mutual fund managers of 2009 [Morningstar]

Thursday, January 14, 2010

Value Investing Congress Speakers Announced & Discount

The Value Investing Congress is back on May 4th & 5th 2010 in Pasadena, California at The Langham Huntington Hotel & Spa. This event is a great place to network and to hear actionable investment ideas from prominent hedge fund managers. We've secured a discount for our readers and you can save $1,600 off the regular price if you register with code P10MF4 by January 21st.

They've announced the list of speakers at the Spring event and there are some great names lined up:

  • John Burbank, Passport Capital
  • Bruce Berkowitz, Fairholme Capital Management
  • Paul Sonkin, The Hummingbird Value Funds
  • Mohnish Pabrai, Pabrai Investment Funds
  • Patrick Degorce, Thélème Partners
  • Thomas Russo, Gardner, Russo & Gardner
  • David Nierenberg, The D3 Family Funds
  • Lloyd Khaner, Khaner Capital
  • J. Carlo Cannell, Cannell Capital
  • Whitney Tilson & Glenn Tongue, T2 Partners

Mohnish Pabrai's hedge funds were up over 118% for 2009 so it will be interesting to see what ideas he has this time around. And then of course here on the blog we've covered portfolio movements from John Burbank's Passport Capital, Whitney Tilson's T2 Partners and Bruce Berkowitz's Fairholme Fund, so we know they'll provide thought provoking ideas as always.

It truly is THE premier investing conference out there. Speaking about his experience at the last event, Joel Greenblatt of Gotham Capital says "it was a fabulous event and I give it my highest recommendation."

Click here to receive your discount to the Value Investing Congress and be sure to use discount code: P10MF4.

Hedge Fund 2009 Performance Numbers

It's time to check in on how prominent hedge funds performed in the year of 2009. Don't forget that in the past we also presented a comprehensive post on 2008 hedge fund performance numbers if you wanted to cross-reference. A big hat tip goes out to the anonymous investors and readers who sent us hedge fund letters, Dealbreaker, & Marketwatch for all providing data.

Without further ado, let's check out how major hedge funds fared this past year:

Hennessee Hedge Fund Index: +24.85%
S&P 500: +26.5%

John Paulson's firm Paulson & Co
Advantage Fund: +13.75%
Advantage Plus Fund: +21%
Credit Opportunities Fund: +34%
Recovery Fund: +24.2%

Mohnish Pabrai: Pabrai Investment Funds
PIF2: +122.5%
PIF3: +125%
PIF4: +118.8%

Barton Biggs' Traxis Partners
Traxis Fund: +38%

Och Ziff Capital Management
Master Fund: +23%
Asia Master Fund: +33.6%
Global Special Investments Master Fund: +8.3%
European Fund: +16.3%

David Einhorn's Greenlight Capital
Offshore Fund: +30.6%

Dan Loeb's Third Point LLC
Offshore Fund: +38.6%
Partners Fund: +38.2%
Partners Qualified Fund: +33.3%
Ultra Fund: +44.2%

Peter Thiel's Clarium Capital
Fund: -25%

Marc Lasry's Avenue Capital Group
International Fund: +66%

Steven Cohen's SAC Capital
International Fund: +28.39%

Ken Griffin's Citadel Investment Group
Kensington Fund: +61.84%

Philip Falcone's Harbinger Capital Partners
Partners Fund: +46.55%

David E. Shaw's D.E. Shaw & Co
Oculus Fund: +8.7%
Composite Fund: +21.1%

Ray Dalio's Bridgewater Associates
Pure Alpha II Fund: +2.00%

George Soros' hedge fund Soros Fund Management
Quantum Endowment Fund: +28%

Paul Tudor Jones' Tudor Investment Corp
BVI Global Fund: +16.51%

Louis Bacon's Moore Capital Management
Global Fund: +20.6%

Bruce Kovner's Caxton Associates
Global Fund: +6.15%

Dmitry Balyasny's Balyasny Asset Management
Atlas Global Fund: +8.64%

So, 2009 performance results look to be the polar opposite of 2008 results for some firms. Many notable firms who performed poorly in 2008 did well this past year and have surpassed their high water mark including David Einhorn's Greenlight Capital, Steven Cohen's SAC Capital, and Philip Falcone's Harbinger Capital Partners, among others.

Sticking with the theme of polar outcomes, we want to turn our focus to the tale of two hedge funds. Mohnish Pabrai's hedge fund firm Pabrai Investment Funds executed extremely well over the course of last year as all of his funds returned in excess of 118%, beating the S&P 500 by a wide margin. Global macro fund manager Peter Thiel on the other hand, got beat up by the S&P 500 by a wide margin. His Clarium Capital was -25% for the year and lost 10% in December alone. The struggles continue for his hedge fund as they've lost money two years in a row now.

While Clarium often has thorough and insightful research, we've questioned whether their philosophical thoughts can be translated into executable trading strategies. Maybe they have suffered from market timing or investment vehicle selection missteps, who knows. What we do know though, is that they need to turn things around. Clarium does not charge a management fee and as such their firm's revenue is reliant on a performance fee (a.k.a. market outperformance). Since they haven't outperformed much recently, they haven't earned much money. Thiel is sticking with his venture though and the firm made enough money from their strong prior years in order to stay in operation. Assets under management at Clarium are now at $1.33 billion, way down from their peak of $7.3 billion.

Now that you've seen how many of the biggest names in hedge fund land have fared, make sure to also check out which stocks boosted their gains in a list of the top ten stocks owned by hedge funds. Additionally, head over to our compilation of 2008 hedge fund performance numbers if you want to compare how funds did on a year over year basis. Many thanks to those of you who helped compile this list. If you've got more prominent hedge fund performance numbers for 2009, comment below or send them our way:

Overweight Equities, Underweight Bonds

Bank of America Merrill Lynch is out saying to overweight equities and underweight bonds. Their Research Investment Committee (RIC) says that long-term investors should buy 'humiliation' and sell 'hubris,' noting that equities are currently a 'humiliated' asset class. They attribute this classification to the past ten year performance of large cap equities, a period where these assets performed worse than in the 1930s. They write, "on a relative basis they have clearly suffered the greatest ignominy over the past 10 years and despite the rally of the past nine months remain the most unloved and undervalued asset class." Hedge funds would certainly agree with the notion to get long equities as they've had considerable net long exposure for some time now.

Why To Buy Stocks

In BofA's allocations, they are beefing up equities holdings from 60% of the portfolio to 65%, while reducing bonds from 35% down to 30%. They argue that stocks are cheap relative to both government bonds and corporate bonds, citing equity risk premium ("a measure of excess return of the S&P 500 earnings yield minus the yield of 10-year TIPS"). See the chart below for an illustration of this measure:

(click to enlarge)

Additionally, they cite that investors are clinging on more to fear than greed in regards to sentiment toward equities. This is evidenced by massive inflows into bond funds in 2009 and selling of US equity funds over the course of last year.

Lastly, Bank of America Merrill Lynch argues that equities should see more favorable returns than bonds in 2010 because there has been a transfer of balance sheet risk from corporations to the government. Specifically speaking on equity strategies, they are overweight energy and industrials. Additionally, they favor large financials (market caps > $20 billion).

International Equities Versus US Equities

In their report (focused on asset allocation strategies), we see that they recommend more international exposure because investors have what they call "investor home bias," a condition where investors often have considerable home-country holdings and only modest amounts of foreign exposure.

Secondly, their Research Investment Committee argues that emerging markets have not yet reached 'hubris' status. They would be worried about emerging markets once multiples start to climb as high as 48x forward earnings like we saw during the tech bubble. (The MSCI Emerging Market Index is only trading at 13x P/E ratio). Turning to implementation, they recommend investing in Asia and emerging market consumer stocks. Additionally, they are overweight 'best of breed' global financials (and in particular those in Brazil, China, and Europe). Below you'll find a breakdown sheet outlining their global equity market convictions and ideas:

(click to enlarge)

As you can see, they are taking a bit of a contrarian approach to the investing public's moves in 2009. Last year, investors flooded into bond funds and out of stocks. They clearly feel that valuation and potential returns favor equities in this year and are looking for investors to move to the other end of the teeter-totter, balancing things out. This wraps up the recommendations from Bank of America Merrill Lynch's Research Investment Committee. We just recently covered BofA's hedge fund investment trends report as well as their research on the top ten stocks held by hedge funds, so make sure you check those out too.

For more investment ideas for this year, we've compiled plenty of resources including:

- Analysts' best stock picks for 2010

- Ten investment themes for 2010

- Market strategist Jeff Saut's 2010 outlook

- Hedge fund manager Doug Kass' 2010 predictions

Steyer's Hedge Fund Farallon Sells Some Knology (KNOL)

In an amended 13G filed with the SEC, Thomas Steyer's hedge fund firm Farallon Capital has updated their stake in Knology (KNOL). They are now showing a 9.3% ownership stake in the company with 3,342,394 shares. The filing was made due to activity on December 31st, 2009 and this is a slight decrease in their position. According to their last disclosure of positions on September 30th, 2009, Farallon owned 3,924,177 shares. This means that they have sold 581,783 shares, a 14.8% decrease over the past three and a half months. You can view the rest of Farallon's portfolio here.

We've also covered other activity out of Thomas Steyer's hedge fund firm over the past few months. They recently added to their Beacon Roofing (BECN) stake and made a few portfolio and internal firm adjustments as well. Farallon is a multi-billion dollar hedge fund founded in 1986 that typically employs risk arbitrage strategies.

Taken from Google Finance, Knology is "an integrated provider of video, voice, data and advanced communications services to residential and business customers in 10 markets in the Southeastern United States and two markets in the Midwestern United States. The Company provides its services over its wholly owned, fully upgraded minimum 750 megahertz interactive broadband network."

Wednesday, January 13, 2010

John Griffin's Blue Ridge Capital Reveals Short Position

Disclosures of short selling in UK financial companies by hedge funds have been few and far between during the last six months. However, we've been able to track down a short sale because we follow hedge fund disclosures in UK markets.

Yesterday, the London Stock Exchange news service revealed that John Griffin’s Blue Ridge Capital was short 0.24% of Legal and General's common shares (FTSE: LGEN) on the 8th of January. This is a rare glance into a prominent hedge fund's short book as these firms typically keep these positions closely guarded. However, when they are required to file a disclosure (as is the case here), we get an occasional taste. You can view the rest of Blue Ridge's portfolio here.

Blue Ridge is not the only hedge fund shorting Legal and General as London based hedge fund manager Meritor Capital also held a 0.37% short position on the 8th of January. Meritor are fundamental stock-pickers that place emphasis on understanding businesses at ground level and meeting regularly with company management. They support this process with retained advisers, industry consultants and field visits.

Fellow UK hedge fund firm Lansdowne Partners have also had a short position in Legal and General fairly recently as they were short 1.76% of LGEN's shares on the 11th of November 2009. See our coverage of Lansdowne's portfolio here.

Just yesterday we talked about the fact that many hedge funds took it on the chin from their short positions in 2009 and examined the common link in companies they were shorting. There has always been an aura of mystique around short selling given the high level of secrecy. So, when we finally get a chance to see what they're shorting, it's exciting. We've gotten tastes of this recently when we saw some short positions from Whitney Tilson's hedge fund T2 Partners, and in the past through Bill Ackman's short of Realty Income, and David Einhorn's short of the ratings agencies. We'll continue to reveal these positions as we find them.

From Google Finance - Legal & General Group Plc is "a provider of risk, savings and investment management products in the United Kingdom. It operates in five segments: Risk, Savings, Investment management, International, and Group capital and financing. The Risk segment includes individual and group protection, individual and bulk purchase annuities, and general insurance, together with estate agencies and the housing related business conducted through its mortgage network. The Savings segment comprises non profit investment bonds, non profit pensions, individual savings account, retail unit trusts, and all with-profits products. The Investment management segment comprises institutional fund management and institutional unit trust business. The International segment comprises businesses in the United States, France, the Netherlands and emerging markets. On June 5, 2008, the Company acquired Suffolk Life Group Plc."

Tracking Hedge Fund Positions in the UK

We had previously published a brief look at how to track a hedge fund's positions in the UK. We wanted to update that piece a bit and break it down to make it easier to understand. After all, we occasionally cover hedge fund holdings in UK markets. Recently, we've detailed how hedge fund Eton Park expanded their UK positions and you can view the rest of our UK updates here. So, let's examine how to do this:

The UK differs from the US in that disclosure is not required on a periodic basis (as in the case of disclosures required quarterly on a 13F in the US). Instead of “across the board” disclosure on a regular basis the UK system is more event driven. There are four main sets of circumstances under which investment funds and hedge funds are required to disclose long and short positions in UK listed companies.

1. Large holdings in a company

Shareholders with a substantial long position of greater than 3 per cent of a company's outstanding equity are required to disclose it. Note that this includes rights to acquire shares via derivatives at a later date such as Contracts for Difference (CFDs) or options.

Once a fund crosses above 3% of a company’s equity it has to report any further changes at 1% increments (regardless of whether it is a purchase or a sale). For example, if a fund moves from 3 to 4% of total ordinary shares or from 4 to 5%, they must disclose the change. They must also report sales, for example, from 7 down to 6% until they fall below the 3% threshold where one final filing is required to acknowledge that the fund no longer has a concentrated ownership stake.

Large shareholders in companies that trade on the main market are required to simultaneously inform the issuer and the Financial Services Authority (FSA) of changes to major holdings using a TR-1 form. Substantial shareholders in companies that trade on the exchange-regulated markets (such as AIM or Plus Markets) need only inform the issuer of changes to major holdings in that issuer's shares. Issuers must then disclose this information to the wider market via the Regulatory News Service of the London Stock Exchange.

2. Takeovers

Under Rule 8.3 of the Takeover Code if a fund holds 1% or more of the stock of the offeror or the offeree in a takeover all dealings (including derivatives) must be disclosed by no later than 3.30 pm (London time) on the day following the date of the relevant transaction. This requirement continues throughout the offer period. A disclosure table giving details of the companies involved in takeovers is available for the public to view on the Takeover Panel’s website.

If two or more hedge funds act together to acquire an interest in the securities of the offeror or the offeree company they are deemed to be a single entity and need to disclose as such. Under Rule 8.1 all transactions in the stock of the offeror or of the offeree company by the offeror or the offeree company must be disclosed by no later than 12.00 noon (London time) on the business day following the date of the relevant transaction.

3. Rights issues and short positions

Hedge funds that have a short position of 0.25% or greater in a UK listed company that is undertaking a rights issue are required to disclose it. The deadline for disclosures is 3.30 pm on the business day following the day the short position threshold was crossed

4. Financial companies and short positions

Hedge funds that are net short of a UK financial sector company are required to disclose the position if it is greater than 0.25% of the firm’s issued share capital. In addition, the fund must disclose each time it increases the short by 0.1% of issued share capital (e.g., at 0.35%, 0.45%). The list of companies deemed to be “fianancial sector companies” is available in PDF format on the FSA website .

We'll continue to cover hedge fund movements in UK markets. Click here to follow our coverage on UK portfolio updates thus far.

Further Reading

Disclosure of Contracts for Difference - Questions & Answers - Version 2 [PDF]

List! Issue No. 14 - Transparency Directive - December 2006 [PDF]

List! Issue No. 14 (Updated) - April 2007 [PDF]

Additional information on the responsibilities of major shareholders is also available.

Information about third country investment manager disclosure non-EEA investment managers. [PDF]

The Takeover Panel’s website.

Tuesday, January 12, 2010

Long/Short Equity Hedge Funds Shift From Growth To Value Stocks

As per Bank of America Merrill Lynch's latest hedge fund monitor report, we see that 2010 is off to a flying start. Hedge funds have started the year strong performance wise and were out buying equities and commodities. This comes after hedge funds returned over 17% in 2009, a polar opposite of their return in 2008. Back in December 2009 we noted that hedge funds were very long equities and that trend has continued as trades taken so far this year include extending their net long position in equities, moving further into crowded longs in crude oil and the US dollar, as well as continuing to hold yield curve steepeners. While PIMCO's Bill Gross has offered up an explanation for why the stock market was up 70+% last year, we know that all the buying by hedge funds certainly didn't hurt either.

Hedge Fund Long & Short Positions

Taking a look at the largest long positions, we see that the hedge fund universe as a whole are very long the Nasdaq (NDX), gold, crude oil, heating oil, and the US dollar. Shifting to their short positions, they are bearish on natural gas, the euro, as well as 10 & 30 year treasuries. The bearish sentiment on treasuries and their wager against them via yield curve steepeners is by no means new. We've covered this trade extensively for quite some time. One of the original hedgies Michael Steinhardt himself has called treasuries foolish. Legendary investor and ex-Quantum fund manager Jim Rogers shares this sentiment and dislikes treasuries. Hedge fund legend Julian Robertson is betting on higher interest rates and is doing so via constant maturity swaps (CMS). We could go on, but the point is that many prominent hedge funds have been in this play for a while now.

Let's now shift to specific hedge fund strategies. We typically like to focus on stockpicking hedge funds here at Market Folly since they're the easiest to track. However, below we'll cover exposure levels of market neutral funds, long/short hedge funds, as well as global macro hedge funds.

Market Neutral

Hedge funds employing a market neutral strategy have kept market exposure flat (appropriately). They have been tilting towards growth names and high quality stocks. As it pertains to inflation, they have neutral expectations. Overall, market neutral funds are neutral equities and have been moving toward higher quality names.


Hedge funds in the long/short domain have brought their exposure levels back up to 'average' levels as they are now around 36-37% net long. Contrary to their market neutral fund colleagues, long/short funds as a whole have recently favored value stocks, buying both large caps and 'low quality' names. As it pertains to inflation, they have positive inflationary expectations. The main takeaway here is that l/s funds have shifted from growth names to value names.

Global Macro

Global macro hedge funds often move in and out of positions much more frequently so keep that in mind. To start the year, these funds were buying the S&P 500 (SPX/SPY) and selling the Nasdaq (NDX). They held their net long positions in commodities but have continued to cover shorts in the US dollar. These funds also aggressively sold emerging markets as they reduced their stake in this crowded long. Again touching on the treasuries trade, we see that global macro funds were adding to their shorts in the 10 year treasury last week. The chart below again emphasizes the various hedge fund positions in treasuries:

(click to enlarge)

This trade has become awfully drawn out and could be due for a breather. For those of you still interested in learning how to replicate this play though, head to this post on curve steepeners.

That wraps up our coverage of hedge fund exposure levels for now. For more research as to what the smart money is investing in, check out the top 10 stocks held by hedge funds, as well as 10 investment themes for 2010.

Hedge Fund Short Positions: High Operating Leverage the Common Theme

Upon reading various hedge fund investor letters and conversing with colleagues in the industry, one thing has become quite clear: hedge funds got their asses kicked on the short side of the portfolio in 2009. This is by no means a shocking revelation given that the stock market itself has risen over 70% from the lows back in March 2009. After all, a rising tide seems to lift all boats. While the negative performance of short positions over the past year is a common trend, we want to focus on a theme found in many of their portfolios.

Here's the common link: many hedge funds have shorted businesses with high operating leverage. Amidst the crisis of the past two years, operating and financial leverage became quite a detriment to various companies. Hedge funds quickly recognized this and shorted shares of companies who would struggle with this burden in an uncertain economic climate. At the time, it was a poignant move. However, markets are often driven by perception (versus reality).

What are we talking about here?

We're simply pointing out that the high operating leverage that was once seen as a detriment to the companies that hedge funds were/are shorting can now be construed as an attribute.
According to the market, the economy is recovering and things are slowly but surely getting better. (More appropriately, the markets have been the beneficiary of massive capital inflows). Regardless, this market rebound re-instills confidence and shifts investor sentiment. And, most importantly, it reverses risk tolerance.

The very companies investors avoided like the plague during the crisis are now catching a bid because investors' risk tolerance has returned. Many hedge funds missed this swing in perception and bore the brunt of the blow. It doesn't matter right now if the company could potentially have problems due to their operating leverage. Right now, all that matters is that risk tolerance has returned and risk is 'in'. This goes back to the age old market debate of perception versus reality.

We can't tell you how many times we've seen hedge funds comment on the 'mistakes' they made in 2009. Almost all of their mistakes are on the short side of the portfolio. And while they don't name specific stocks, they mention the sectors and attributes of their shorts. Many of their errors have come from shorting companies with high operating leverage that rallied furiously ahead of the rest of the market. While hedge funds were bound to take losses on the short side of their books because they had to be short something in this monster rally, it's interesting to note that the vast majority of their mistakes boil down to companies with that same common link. Looking back, it's a bit of a 'captain obvious' moment.

Andreas Halvorsen's hedge fund Viking Global started feeling the pain from their shorts as early as the second quarter. Chase Coleman's hedge fund Tiger Global had problems with their short positions as early as the first quarter 2009. Many of these hedge funds were (and still are) shorting banks, REITs, luxury hotel chains, and capital goods companies (industrials).

More than anything, this just reiterates the fact that caution must be exercised when shorting companies with high operating leverage. Arguably even more important, this showcases that it pays to monitor market perception and investor risk tolerance. Many hedge funds absorbed the initial ramp higher in their short positions but eventually entered the house of pain as they stood by their conviction. This is why sometimes you have to pay attention to more than just fundamentals.

It's interesting to look back on this now and see such a common theme. As we like to say: the opportunities clear in retrospect are often unclear in prospect. Still though, some will argue that 2009 was bound to be a losing year on the short side regardless of the companies targeted simply because you were fighting an uphill battle... against the government's $1.5 trillion blank check.

Monday, January 11, 2010

John Paulson Discloses SuperMedia (SPMD) Position

John Paulson's hedge fund firm Paulson & Co has just filed a 13D with the SEC and has disclosed a 17.4% ownership stake in SuperMedia (SPMD). The filing was made due to activity on December 31st, 2009 and they now own 2,607,506 shares. This is a newly disclosed stake for them as they did not show share ownership of SPMD when we previously looked at Paulson's portfolio. SuperMedia is the new name for Idearc, who recently emerged from bankruptcy.

Their position in SuperMedia does require some explanation as they didn't just solely purchase shares. Taken direct from the SEC filing, we see that "A total of $12,117,456 was paid to acquire shares pursuant to the Standby Purchase Agreement. Additionally, the Reporting Persons (Paulson) paid a total of $455,895,831 for debt securities of the Issuer (SPMD) that was exchanged for cash, new debt securities of the Issuer and shares of Common Stock pursuant to the First Amended Joint Plan of Reorganization with the United States Bankruptcy Court."

So, we now see that back on November 18th, 2009 Paulson entered into a Standby Purchase Agreement. Paulson also entered into a Standstill Agreement whereby he can nominate one board director as long as his firm owns at least 20% of the outstanding shares. Paulson's potential ownership of common stock has also been limited to 45% of the outstanding shares and this agreement has a four year term.

Of the 2,607,506 shares Paulson owns, 4.7% of those are common shares purchased under the Standby Purchase Agreement and 12.7% of those shares were acquired upon the exchange of debt securities pursuant to the Plan. Got all that? For more information on Idearc's emergence from bankruptcy as the new SuperMedia, head to this press release.

This latest portfolio movement comes amongst the recent fanfare surrounding John Paulson's new gold fund which we covered extensively. Paulson of course has gained notoriety for his huge bet against subprime over the past few years where he made billions. Wall Street Journal columnist Gregory Zuckerman has detailed Paulson's amazing play in his new book The Greatest Trade Ever (see our review here).

Other recent portfolio activity out of hedge fund Paulson & Co includes doubling down on their Cadbury stake (CBY) and taking a position in Conseco (CNO). For more insight from Paulson, check out their third quarter investor letter. Lastly, you can also view the rest of John Paulson's equity holdings here.

Taken from Google Finance, SuperMedia (formerly Idearc Inc.) "serves as the advertising agency for small-to-medium sized businesses with a variety of advertising solutions."

Raymond James' Strategist Jeff Saut: Watch the US Dollar

Jeffrey Saut, Chief Investment Strategist for Raymond James is back with his weekly market commentary. This week's investment strategy entitled, "Predictions?!" focuses on Saut's commentary about recent economic data and things to watch for this year.

As it pertains to the markets, Saut says, "Dynamically, participants should still be long half of the index trading positions recommended months ago, but with close trailing stop-loss points. Strategically, we think it is appropriate to hedge, or harvest, partial positions in the investment account." We would agree with him here because not only are we proponents of running a hedged book, but it never hurts to lock in some gains or protect them with stop-loss triggers.

Turning his focus to new investments, Saut highlighted three specific stocks taken from their Analysts' Best Picks list. From that list, he singled out shares of CVS Caremark (CVS), National Oilwell Varco (NOV), and Alpha Natural Resources (ANR) as stocks they think will perform well.

Lastly, Saut points out that the rally in the US dollar has been a major development since it was such a swift and large move. However, the dollar has since weakened a little bit and money has started to flow into "stuff" stocks (i.e. commodities). He notes that if the recent weakness in the dollar is a 'headfake' and if the dollar strengthens again that, "it has significant implications for the various markets." We'll have to wait and see what develops in that regard. You can download Saut's full investment strategy via .pdf here.

For more from Jeff Saut, check out his 2010 market outlook as well as his commentary from last week, 'lessons learned.'

Regulators Seek To Throw Light On Hedge Fund Impact In Energy Trading

The following is a guest post from Darrell Delamaide for

Do hedge funds have an impact on energy trading?

While the answer might seem intuitive, the debate as to whether they actually do has come to resemble the medieval theological dispute about how many angels can dance on the head of the pin.

Because, like angels, many trades in energy futures are invisible, and it is often not possible to pinpoint where they take place.

And yet, for most of us, including lawmakers on Capitol Hill, it seems obvious that when hedge funds buy and sell billions of dollars worth of oil and gas futures, it must be having an impact on energy prices. While hedge funds and other speculative traders would never dream of taking delivery of a barrel of oil, their trading activity affects the prices for actual consumers of oil and gas and their downstream customers – or so it would seem.

When Gary Gensler, a former Goldman Sachs banker and Treasury Department official, was nominated last year as chairman of the Commodity Futures and Trading Commission – the chief regulator for energy futures trading – he reversed the CFTC party line that speculators don’t have an impact on energy trading.

“I believe that excessive speculation in commodity futures can cause sudden or unreasonable fluctuations or unwarranted changes in commodity prices,” Gensler said in a written response to lawmakers’ questions ahead of his nomination hearing.

Gensler went on to pledge that if confirmed, he would have the CFTC guard against such speculation.

While he stopped short of saying that excessive speculation had taken place in the run-up of energy prices in 2008, he did express the opinion that the rapid growth of commodity index funds and increased hedge fund allocation to commodity assets contributed to the “bubble in commodities prices that peaked in mid-2008.”

He noted that non-commercial investors sometimes account for up to 90% of open interest in a contract. (Open interest is a calculation of the number of active trades for a particular market, and is used as an indicator whether trading is becoming more or less active.)

Gensler’s answer, enshrined in draft legislation currently before Congress, is to make trades more visible by requiring all over-the-counter derivatives to trade through an approved clearing house. While the thrust of new legislation is to get a better handle on financial derivatives such as credit default swaps, it will give regulators a better picture of all derivatives trading, including energy contracts.

At the same time, the CFTC and the Securities and Exchange Commission both are beefing up their ability to monitor hedge fund activity. The SEC for the first time will require hedge funds to register as investment advisors, and Gensler has pledged closer oversight of the funds that it supervises as commodity pool operators.

The industry, predictably, is pushing back. In congressional testimony on the new legislation, the Chicago Mercantile Exchange, the largest futures exchange in the world, and other exchange operators presented studies based on CFTC data to show that large positions held by index funds and other managed money were not “routinely detrimental” to the commodity markets in the period January 2005 to June 2008.

“All of the trader groups displayed instances of non-optimal behavior (including small traders), but none were consistently harmful to the studied markets,” they said. A task force of the International Organization of Securities Regulators (IOSCO) released a report last March that came to a similar conclusion.

“While reports reviewed by the task force concluded that fundamentals rather than speculative activity was the plausible explanation for price changes, the task force has made a number of recommendations to improve the transparency and supervision of these markets,” IOSCO said.

These included suggestions regarding information about the underlying commodities, access to and sharing of information about trading positions, beefing up enforcement powers, and improving global coordination.

The spectacular collapse of the Amaranth Advisors hedge fund in 2006 when it lost $6 billion on natural gas futures did pull back the veil on hedge fund activity in energy markets. Amaranth built up its huge position in natural gas futures through OTC contracts that exactly mirrored the contracts on the New York Mercantile Exchange but remained hidden from regulators, who were unable to enforce position limits designed to rein in speculative trading.

In hearings about Amaranth before various House and Senate committees as well as at the CFTC itself, it became clear, at least to many lawmakers, that contracts on unregulated trading venues can influence prices.

The case was so straightforward that it prompted the Federal Energy Regulatory Commission to flex its new post-Enron mandate to stop manipulation of energy prices by pursuing disciplinary action against Amaranth.

This led to a turf war with the CFTC, which claimed exclusive jurisdiction over futures trading and argued that FERC’s mandate extended only to spot trading. FERC countered that when activity in the futures market affected spot prices, it was authorized to act.

Those proceedings ended in a joint settlement last August, before either CFTC or FERC held their administrative hearings and before an appellate court could decide the jurisdictional issue.

But the Amaranth case remains as a reminder of what a hedge fund can do in energy markets if these trades are not more transparent. Legislation bringing more visibility to the market and strengthening the hand of regulators will ensure that hedge fund activity in the energy markets will be more closely monitored and limited.

This article was written by Darrell Delamaide for who focus on Fossil Fuels, Alternative Energy, Metals, Oil Prices and Geopolitics. To find out more visit their website at:

Fairholme's Bruce Berkowitz Likes Healthcare Plays

We haven't covered Bruce Berkowitz on Market Folly before since we primarily track hedge funds here. However, there's no reason we shouldn't track him seeing how he is smart, an excellent stockpicker, and runs a concentrated portfolio. For those of you unfamiliar, Berkowitz runs the Fairholme mutual fund (FAIRX).

A $10,000 investment in his fund back in 1999 would today be worth almost $33,000. He founded Fairholme back in 1997 after a career as a managing director for Smith Barney. His Fairholme portfolio typically holds only 15-25 stocks, 20% cash, and employs a value approach. Berkowitz likes to see solid management teams coupled with undervalued companies. His concentrated portfolio allows him to 'bet big' on the stocks he sniffs out.

With this in mind, let's check out his latest focus: healthcare reform. In a recent publication from Money magazine, Berkowitz said he thinks the market is overestimating the impact that Obama's plans will have on healthcare companies. In fact, Berkowitz likes healthcare plays so much that he's put around 25% of Fairholme's portfolio in these sorts of companies. He doesn't think that healthcare reform will hurt profits for drug and hospital companies as much as others anticipate.

So, what companies does Berkowitz like? Here are his picks:

Humana (HUM) and WellPoint (WLP)

With both companies possessing P/E ratios of less than 10, they certainly fit Fairholme's undervalued focus. Berkowitz says that, "these insurers are both generating a significant amount of cash, and that's not reflected in their low stock prices. We don't believe the government will take over providing health insurance, despite fears otherwise."

Pfizer (PFE) and Forest Laboratories (FRX)

These companies also sport low P/E ratios and Berkowitz has taken notice. He says that, "a decade ago people overpaid for drug stocks because they were overly optimistic about earnings potential. Today that pendulum has swung so far the other way that some stocks are priced below their true value." Shares of Pfizer have been marching higher in stair-stepping fashion and trade at much lower multiples than they have historically.

We make special note of PFE because we've noticed many hedge funds buying shares over the past few quarters. After all, Pfizer was the second most popular stock held by hedge funds. Berkowitz is certainly not alone in his fondness for this name. John Griffin's hedge fund Blue Ridge Capital had Pfizer as their third largest US equity holding when last we checked. Whitney Tilson's hedge fund T2 Partners is long PFE. Also, David Einhorn's Greenlight Capital also has a sizable stake in Pfizer and has been bullish on their prospects. While shares have been marching higher, we'll have to see if they continue to do so given the large 'smart money' presence.

So, some interesting picks from Fairholme's Berkowitz. He certainly feels others have overestimated the impact of healthcare reform on these companies. After all, he has almost a quarter of his portfolio in this sector. Lastly, in other interesting news out of Fairholme, we saw earlier that Berkowitz would be opening a bond fund after enjoying success with his equity fund. We'll continue to track his portfolio going forward.

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