Friday, April 16, 2010

The Invisible Hands: Hedge Funds Off the Record By Steven Drobny (Book Review)

Today we're reviewing The Invisible Hands: Hedge Funds Off the Record, the latest valuable book from author Steven Drobny. Many of you will already be familiar with Drobny from his popular first book, Inside the House of Money. Drobny heads Drobny Global Advisors, a macroeconomic advisory firm that has many leading global hedge funds as clients. Needless to say, if you want a great book on hedge funds, he's your guy.

Right off the bat we can tell you we wildly enjoyed reading this solely for the vast amount of information and advice divulged. The Invisible Hands is divided into three parts. The first section deals with "real" money management, a.k.a. the institutional investing of endowments, pensions, & family offices and brings up some very prudent questions regarding portfolio construction. This part of the book includes commentary from Jim Leitner of Falcon Management. Those of you who have read Inside the House of Money will recall that the Family Office chapter in that book which focused on Leitner was one of the most popular. This is an extension of their conversation updated to focus on the market crisis and we found it very insightful given the fact that many endowments did not fare well during the downturn. Additionally, the section also details views from Dr. Andres Drobny of Drobny Global Advisors.

The second section of the book is probably the most entertaining as it features interviews with various global macro hedge fund managers. The chapters are divided into various archetypes Drobny has bestowed upon each manager, including: The House, The Philosopher, The Bond Trader, The Professor, The Commodity Trader, The Commodity Investor, The Commodity Hedger, The Equity Trader, The Predator, and The Plasticine Macro Trader. Needless to say, there is something for everyone in this section of the book as all kinds of global macro hedge fund strategies are detailed. The insight divulged in part two of The Invisible Hands is priceless.

One possible pitfall to potential readers could be the fact that each hedge fund manager's identity is hidden. Before reading the book, we were slightly skeptical that this aspect would diminish credibility. For those of you who may be hesitant, we'll go ahead and allay those fears for you right now. We were quickly proven wrong upon sampling the worthwhile words of wisdom each manager had to offer. We also had the chance to ask Drobny himself about this and he highlighted a very prudent point: without anonymity, this book would have never been written. Drobny mentioned to us that, "Normally, people don't get access to sit down and have a chat with managers at this level so the anonymity allowed that to happen."

This just goes to reinforce how secretive and guarded the hedge fund world is. Each bit of information comes at a price, and this time the price you pay is identity. As such, it's a no-brainer to take insight masked by anonymity over no information at all. The book not only contains wisdom from managers who survived the crisis unscathed, but also from those who prospered. As far as personal favorites go, Chapter 13: The Plasticine Macro Trader steals the show. You'll start the book casually wondering who some of these managers are and you'll end the book really wanting to know all their identities. We have a very good guess as to who Chapter 13 is, but we'll wait for that manager to "out" themselves. But if you want a hint: we've covered this eclectic manager on the site numerous times before.

The Invisible Hands concludes with part three and an interview with The Pensioner. This final chapter turns back to "real money" managers and highlights a successful pension fund manager that did not lose money in 2008. Those of you further interested in the topics of risk management and portfolio construction will find this last section compelling.

Many books that have come out of the financial crisis focus on learning from mistakes. Drobny's book, on the other hand, pinpoints managers who fared well in 2008 as they were either able to preserve capital or grow it. The book targets global macro funds because their foundation is anchored by the tenets of risk management rather than returns. This allows readers to learn from those who found success during a time when many others failed.

All in all, we treasured The Invisible Hands: Hedge Funds Off the Record and highly recommend it to anyone looking to learn from top hedge fund managers. We found the book's particular focus on global macro strategies especially intriguing given that the majority of the coverage on our site centers on long/short equity hedge funds. Those of you looking for a peephole into the fast paced world of global macro would find this book advantageous. And if you manage money, then Drobny's new book is simply a must read.


For more insightful books on markets and investing, be sure to check out our recent reviews of Harry Markopolos' book No One Would Listen and Scott Patterson's The Quants. Additionally, we've assembled quite the compendium of recommended reading lists worth checking out.

Eliav Assouline's Hedge Fund Axial Capital Management Adds to a Position

This is the first time we've covered Eliav Assouline and Marc Andersen's hedge fund Axial Capital Management so we'll cover some brief background before diving into the latest portfolio update. Assouline founded the fund in 2005 and is known as a 'Tiger Seed' because Axial was seeded by legendary hedge fund manager Julian Robertson. Axial offices along with other Tiger Seeds at the historic 101 Park Avenue address and joins the proverbial Tiger Management family tree.

Now, turning to the latest portfolio activity out of Axial, we see that they have filed a 13G with the SEC in regards to shares of Macquarie Infrastructure Company (MIC). The filing was made due to activity on April 5th, 2010 and they now own 5.03% of the company (MIC) with 2,283,210 shares. This is an increase in their position as they previously owned 1,428,734 shares on December 31st, 2009. This means that Axial boosted their stake by 59.8%, adding 854,476 more shares over the past four months.

Year to date for 2010, shares of Macquarie are up over 31%. Also, we see that another Tiger Seed hedge fund has a large stake in shares of MIC: Manish Chopra's Tiger Veda Management. Taken from Google Finance, Macquarie Infrastructure Company LLC (MIC) "owns, operates and invests in a diversified group of infrastructure businesses in the United States. The Company operates in two segments: the Energy-Related Businesses and the Aviation-Related Business."

To see what other top investment managers are up to, head to our latest hedge fund portfolio tracking.

Mark Cuban Discloses Lions Gate Entertainment (LGF) Stake; Carl Icahn Raises His Bid

If you thought the Lions Gate Entertainment (LGF) situation couldn't get anymore interesting, leave it to Mark Cuban to possibly throw a wrench in Carl Icahn's plans. The billionaire owner of the NBA's Dallas Mavericks recently filed a 13D with the SEC revealing a 5.4% ownership stake in Lions Gate Entertainment (LGF) with 6,369,315 shares. In total, Cuban purchased $27,897,430 worth of LGF.

Additionally, in the fine print, we see that Cuban "has sold to counterparties the right to put to him 2,000,000 shares of common stock at a price of $7.50 per share, if exercised prior to or on January 22, 2011." If those puts were to be exercised, Cuban's stake in LGF would then rise to 7.1%. Since he has sold puts (instead of buying them), this is not a hedge to his position, but rather a bullish wager. Below is a breakdown of Cuban's purchases as he started buying in late March and continued into early April:

(click to enlarge)

While Cuban has only disclosed he purchased for "investment purposes," keep in mind that a 13D filing signals an activist stake so Cuban could possibly have something up his sleeve here. And speaking of activism, you'll remember that corporate raider Carl Icahn has been trying to acquire Lions Gate Entertainment and initially bid $6 per share for the company. Well, late yesterday Icahn raised his offer for LGF to $7 per share and has insisted that management be replaced. Shares were up over 8% after hours yesterday on the news. You can read Icahn's letter to shareholders here.

So, who knows if we'll have a battle of billionaires here, but Cuban could feasibly just be playing the arbitrage in Icahn's possible takeover. The fact that Cuban filed a 13D certainly gives him the option to get involved though. Additionally, you'll recall that Cuban has a history of investing in various companies in the movie industry. As such, we'll continue to watch the developments here. In the mean time, you can view the latest portfolio moves from Icahn, as well as read Icahn's investor letter.

Taken from Google Finance, Lions Gate Entertainment is "the studio with a presence in production and distributions of motion pictures, television programming, home entertainment, family entertainment, video-on-demand and digitally delivered content. The Company released approximately 18 to 20 motion pictures theatrically per year, which include films it develops and produces in-house, as well as films that it acquires from third parties."

Tom Brown's Second Curve Files Form 4 on Primus Guaranty (PRS) Shares

Tom Brown's hedge fund firm Second Curve Capital recently filed a Form 4 with the SEC in regards to shares of Primus Guaranty (PRS). In the filing, we see that advisory clients of Second Curve sold 26,300 shares of PRS at a price of $4.42. The transaction took place on April 14th, 2010 and Second Curve now is left with 5,790,266 shares. As you can see, this is only a drop in the proverbial bucket of their total stake. In terms of other portfolio activity out of hedge fund Second Curve, we recently saw they filed a Form 4 on shares of Taylor Capital Group (TAYC) as well.

For those of you who want to see more position adjustments from Tom Brown's firm, we posted some of their position updates and in the past have detailed Second Curve's portfolio here.

Taken from Google Finance, Primus Guaranty is "a holding company, which conducts business through two operating subsidiaries, Primus Asset Management, Inc. and Primus Financial Products, LLC. Primus Asset Management is an investment manager to affiliated companies and third-party entities. Primus Financial Products, LLC is a credit derivative product company (CDPC)."

Dan Loeb's Third Point Sells More Nabi Biopharmaceuticals (NABI)

Due to activity on April 13th, 2010, Dan Loeb's hedge fund firm Third Point LLC has filed an amended 13D with the SEC regarding their position in Nabi Biopharmaceuticals (NABI). Back in late March, we noted that Loeb was selling NABI shares and this time around is no different.

Third Point now shows a 10.7% ownership stake in NABI with 5,242,100 shares. This means that over the past three weeks, Loeb's hedge fund has reduced their position by 11%, selling 672,000 more shares. While the pace of their sales has slowed up, there's no way for us to tell if they are done offloading NABI shares. We'll continue to follow the developments. In the mean time, we suggest checking out Dan Loeb's recommended reading list as well as Third Point's investor letter.

Taken from Google Finance, Nabi Biopharmaceuticals "is a biopharmaceutical company focused on the development of vaccines addressing unmet medical needs in the areas of nicotine addiction and infectious disease. As of December 31, 2009, the Company’s product in development is Nicotine Conjugate Vaccine (NicVAX), a investigational vaccine for treatment of nicotine addiction and prevention of smoking relapse."

To view the rest of Dan Loeb's investments, you can check out Third Point's portfolio here.

Key Technical Levels to Watch in the Markets

Adam over at MarketClub is out with his latest technical analysis video on the stock market. In it, he takes a look at the extended market as this rally just continues to march on and take no prisoners. He immediately points out that the Dow Jones is trading around 11,144 and that the 61.8% fibonacci retracement is just up ahead at 11,241 and could potentially be a source of resistance for the market.

Looking at the S&P 500, the fibonacci retracement situation is nearly identical as the market is trading around 1,211 and the retracement sits just ahead at 1,226. Adam points out that this will be a very key area to watch. By no means is he recommending you short this market just yet as that's essentially a deathwish. Everyone that has tried that thus far has burned. However, it's always helpful to be cognizant of key levels to watch in the markets. Click the chart below to watch the video:

Those above fibonacci levels are something to keep an eye on and you should really only consider putting out shorts once the market starts showing signs of weakness first. In the mean time, it never hurts to lock in some profits, trim some positions, and raise cash levels. While hedge funds will almost always have short positions on, you have to remember that they've been burned by the majority of those positions as of late. This technical analysis is obviously more from a market timing perspective and you can view MarketClub's latest video analysis here.

What We're Reading ~ 4/16/10

Benjamin Graham's P/E10 ratio [Greenbackd]

Goldman Sachs says oil is going to $99 ... deja vu? [Pragmatic Capitalist]

A video look at some of the latest activist investing situations & 13D filings [Reformed Broker on]

Why the Yale model of investing doesn't work for everyone [Justin Fox, Harvard Business Review]

10 rules for investing [The Big Picture]

Did long/short hedge funds fail investors in 2008 & 2009? [All About Alpha]

All roads lead to inflation [Humble Student of the Markets]

A look at the correlation between bond yields & equities [Trader's Narrative]

The Magnetar trade: how one hedge fund kept the bubble going [ProPublica]

An interview with Mohnish Pabrai [Forbes]

Deep truth about markets and investing; a great list [Crossing Wall Street]

And an interview with legendary contrarian David Dreman [ValueWalk]

Lampert's hedge fund buys junk rated paper from Sears [Bloomberg]

Generating alpha with merger arbitrage [Morningstar]

Event driven hedge funds in vogue [MarketWatch]

Merrill Lynch's $50 billion feud [Fortune]

Thursday, April 15, 2010

Mobile Internet as the Next Big Investment Opportunity: Internet Trends Presentation

Morgan Stanley recently issued a technology presentation focused on internet trends that we found intriguing from an investment standpoint. In the past, we've covered how many hedge funds have made large wagers on technology and in particular the mobile internet. They've placed these bets via:

- smartphones
- wireless transmission of data
- spectrum
- cloud computing
...and more

Morgan Stanley takes a look at internet trends in-depth and confirms (if it wasn't already obvious enough) that yes, mobile internet is the next big thing. In short, MS thinks that the mobile internet will eclipse the desktop internet in five years time. What's interesting is that they also highlight that social networking users surpassed email users back in mid 2009. So instead of telling people to email us, maybe we should instead solely tell people to follow us on Twitter and to become our fan on Facebook. Mobile internet has certainly helped facilitate this trend as people can access their information from almost anywhere, anytime.

MS notes that we are just in the early innings of the mobile internet cycle, in what they deem the "5th cycle of the last half century." Mainframe computing was big in the 1960s, mini computing in the 70s, personal computing in the 80s, desktop internet in the 90s and now mobile computing in the 2000s. And of course they highlight that Apple (AAPL) is leading in mobile innovation (at least for now). Thus it should come as no surprise that AAPL is one of the most popular stocks among hedge funds. Morgan Stanley believes that pricing, application ecosystem, and user experience will be the big drivers for success in the mobile devices arena.

They then touch on infrastructure and how 3G is key to the success of mobile internet. Well, hedge funds are already hot on that trail as the wireless transmission of data has been a big theme in portfolios. Hell, Phil Falcone's hedge fund Harbinger Capital even announced their own plans for a 4G wireless network. The takeaway here is that mobile phone usage is increasingly focused on data usage, not voice usage. We've touched on how hedgies are playing this theme via wireless tower stocks as mobile service providers scurry to increase speeds and meet rising demand.

The other big keyword these days is the 'cloud,' as in cloud computing. MS identifies (CRM) as the company to look towards if you want to play the trend there. Central storage of information that is accessible from anywhere will be a key focus going forward. MS also notes that (AMZN) could benefit from this having already revolutionized commerce. Not to mention, we recently saw that David Stemerman's hedge fund Conatus Capital is bullish on cloud computing as well. In addition to those aforementioned stocks, it's clear that the likes of Apple (AAPL) and Google (GOOG) will benefit from the emergence of mobile internet. After all, that's why they are some of the top stocks owned by hedge funds.

Below is Morgan Stanley's recent presentation on internet trends:

You can directly download a .pdf here.

If you're looking to connect the dots between trends and investment opportunities, we highly recommend you check out hedge fund Coatue Management's technology trends presentation. Philippe Laffont started this technology focused hedge fund in 1999 and you can view Coatue's portfolio here. Some of their recent position activity includes doubling down on their stake of STEC (STEC), a producer of solid-state storage drives. They are definitely one of the go-to hedge funds if you're looking for technology related investment ideas.

Data seems to be the common link in the latest technological trends as the world is increasingly focused on: the storage of data, the wireless transmission of data, and the ability to access that data from anywhere. While data may be a focal point, mobile internet is certainly the trend.

Andreas Halvorsen & Viking Global Betting On Visa (V): Portfolio Update

Dealbreaker recently posted up the latest letter from Andreas Halvorsen's hedge fund Viking Global. In it, we learn that Chief Investment Officer David Ott will be stepping down to spend more time with family. We also get a glimpse as to what Viking's portfolio looked like at the end of the first quarter and what their next 13F filing will likely look like. Here are their top 10 positions:

1. Visa (V)

2. Invesco (IVZ)
3. Unilever (UN)
4. Express Scripts (ESRX)
5. Tyco International (TYC)
6. Bank of America (BAC)
7. Metlife (MET)
8. News Corp (NWSA)
9. JPMorgan Chase (JPM)
10. Barclays (BCS)

Right away you'll notice that these positions are slightly different from Viking's prior portfolio that we examined. Four of their top ten longs are either new or re-entered positions, including: Tyco, Metlife, News Corp, and Barclays.

Their largest position, Visa, represents 7.0% of capital in their Viking Global Equities fund. We finally get some color as to the investment thesis for each payment processor in particular via Halvorsen's letter. Viking previously owned Mastercard (MA) as well, but they did not own it at the end of the first quarter. Halvorsen writes,

"Our largest loss in the quarter was in Mastercard (MA.N) which cost us 0.7% in VGE and 0.9% in VLF. We have owned Mastercard at various points since its IPO and continue to believe in the long-term strength of its business model. Mastercard was our largest profit contributor in 2007, second-largest in 2008 and third-largest in 2009. Although we continue to believe in strong secular revenue growth for transaction processors, Mastercard relies heavily on credit card spending (which offers slower secular growth than debit cards) and has suffered a few key customer losses that will weigh on results in the short-to-medium term. Visa, which was our largest position as of March 31, was the beneficiary of this share shift."

This is intriguing to note because some hedge funds have owned both payment processors while some managers have favored one over the other. While Viking is monitoring Mastercard for potential re-entry points, it's clear that for now they'll stick with Visa as they expect its strong debit card exposure to bolster performance. You can see which hedge funds own Mastercard here and which hedge funds own Visa here.

The letter also provides some color on their Express Scripts (ESRX) stake as they expect this big pharmacy benefit manager (PBM) to benefit from the impending brand-t0-generic drug conversion. Viking sees significant upside and thinks ESRX commands a multiple of 20x earnings versus the current 16.5x 2011 numbers. Lastly, we just want to highlight Viking's large position in News Corp (NWSA). That stock of course is one of Seth Klarman's big holdings at Baupost Group.

Results wise, Viking has struggled recently. In the first quarter, they were down 0.1% as noted in our recent hedge fund performance numbers post. Halvorsen mentioned that their poor performance this time around was attributed to a few large long positions. This is a shift from the losses they suffered on the short side of the portfolio in 2009 as covered in a previous Viking investor letter. Viking Global Equities' ten largest single name short positions accounted for 15.9% of capital as of March 31st, 2010.

In terms of a pure long/short trade, Viking, like many other hedge funds, had on a long moneycenter banks, short regional banks trade. Halvorsen writes, "Bank longs contributed 0.2% while Bank shorts cost us 1.3%. The longs represented large, well-capitalized banks that, in our opinion, have adequately provided for losses in their loan portfolios. We were short a collection of smaller, regional banks with significant commercial real-estate related loan exposures that we believe have not yet been fully marked-to-market leading to a need for additional capital over time."

Below is an excerpt Viking's first quarter commentary where Halvorsen addresses the notion of hedge fund herding:

"We are often asked by investors how we think about owning stocks that are widely held by other hedge funds. There is no categorical answer to this question, but I would like to discuss some of the factors we consider when establishing and maintaining positions in companies known to be popular with our peers. First and foremost, the critical issue is whether we are ultimately proven right in our analysis. Every single position we take has been independently researched by a Viking analyst and each investment decision has been thoughtfully deliberated by one or more of our portfolio managers. We do not borrow conviction from another firm or individual, although we frequently find it informative to talk to other investors to understand the attributes they value. These conversations can help us better assess what has already been reflected in the prevailing stock price. Incidentally, we often find the greatest success in investments where we have a differentiated view from the Street, but we do not shy away from high conviction ideas just because other hedge funds are involved. Although we thrive on standing alone, we do not take positions opposite other firms just to be contrarian. We recognize that all the shares of a given company must be owned by someone and it can be comforting to know that the other shareholders represent firms that we respect rather than not. There is obviously some risk associated with being in an investment alongside likeminded investors who may have been trained in the stock-picking trade in similar ways in that we may decide to sell at the same time. To limit the consequences of crowded exits, we pay attention to the liquidity of the stocks we trade and take large positions only in the most liquid stocks in the world. The problem of crowding is most acute in our shorts due to the risk of unlimited loss and the potential for cancelled borrow arrangements. Here we do tread carefully. As you are aware, we are guarded in disclosing our shorts to anyone and we do on occasion limit the size of our positions, or eliminate them altogether, when we perceive a position to be tight in the borrow market or crowded by equity long-short investors. Ultimately, we live and die by our analysis, portfolio management skills and efforts to contain risk – managing crowded trades is merely another challenge we face in delivering attractive returns at reasonable risk."

One last thing we found interesting in Halvorsen's commentary is that he essentially confirmed that all the Tiger Cubs talk and bounce investment ideas off each other. Let's face it, we already knew this. But it's still intriguing to see his response to investor concern over holding stocks that many other hedge funds also own.

Keep in mind that you can replicate Viking's long US equity holdings via the Tiger Cub Portfolio created with Alphaclone, the hedge fund backtesting and replication software we use. Alphaclone gave our readers a special free 30 day trial for those interested, so take advantage of it. While Viking Global was originally founded by three Tiger Management veterans (Brian Olson, David Ott, & Andreas Halvorsen), only one of those founders now remains (Halvorsen).

Wednesday, April 14, 2010

Phil Falcone's Harbinger Capital Shows Stake in Palm (PALM)

In a 13G filed with the SEC, Phil Falcone's hedge fund Harbinger Capital Partners has disclosed a position in Palm (PALM) as of April 12th, 2010. Harbinger now shows a 9.48% stake in PALM with 16,000,000 shares. This is a passive stake as they filed a 13G and if they intended to go activist they would have filed a 13D instead. This is a brand new position for them as we previously did not see it in Harbinger's portfolio. Palm essentially put itself up for sale as it looks for bidders after posting weak results in the most recent quarter.

This stake certainly plays right into Harbinger's wireless investment theme as the hedge fund recently announced plans for a 4G wireless network and they also have a large position in Sprint Nextel (S). Palm of course manufactures smartphones (primarily on Sprint's network) so there's a tie-in there. But you also have to consider that Falcone has a history of taking highly concentrated positions in companies and various M&A situations.

The initial reaction to this stake is that he could be gaming the possible takeover as maybe he sees more value in PALM than the $1-2 billion enterprise value that has been floated around by various analysts. Falcone's prior expertise is primarily in distressed companies and while Palm is not distressed (at least not yet), they certainly have struggled financially in the cut-throat smartphone arena. They still have $387 million in long-term debt as noted in their most recent 10-Q, but they also have $376 million in cash. So, it's hard to say exactly what Falcone's rationale is for taking this stake but clearly he sees an opportunity. We'll continue to monitor the developments.

In terms of other notable activity out of Harbinger, we posted that they had sold some shares of The New York Times (NYT). Philip Falcone's hedge fund was up 1.77% for the year at the end of March as noted in our first quarter hedge fund performance numbers post.

Taken from Google Finance, Palm is "a provider of mobile products for individual users and business customers worldwide. Palm’s products for consumers, mobile professionals and businesses include Palm Pre, Treo and Centro smartphones, as well as software, services and accessories."

You can view all of our previous coverage of hedge fund Harbinger Capital Partners here.

Eddie Lampert Buys AutoNation (AN) Shares

In a Form 4 filed with the SEC, Eddie Lampert's hedge fund firm RBS Partners has updated their stake in AutoNation (AN). Lampert has boosted his holdings by acquiring 137,143 shares on April 9th at a weighted price of $18.2887, 134311 shares on April 12th at $18.2963, and finally 320,985 shares on April 13th at $18.2891 per share. In total, RBS Partners recently purchased 592,459 shares of AN. After all their purchases, Lampert's RBS now owns 59,441,500 shares of AutoNation.

Keep in mind that he also bought shares in his other investment vehicles as well (ESL Investors, ESL Institutional Partners, etc). These purchases were on a smaller scale on the same dates and around the same prices. The overwhelming majority of his position though is held via his hedge fund RBS Partners. Lampert of course recently graced Forbes' billionaire list.

Lampert is known for taking highly concentrated positions in companies and his most notable stake is in Sears Holdings (SHLD) where he has helped orchestrate a turnaround for the company. Before founding his hedge fund, he worked with Robert Rubin at Goldman Sachs' risk arbitrage desk. Make sure to check out Eddie Lampert's RBS Partners portfolio as well as Lampert's annual letter.

Taken from Google Finance, AutoNation is "is the automotive retailer in the United States. As of December 31, 2009, the Company owned and operated 246 new vehicle franchises from 203 stores located in the United States. Its stores sell 33 different brands of new vehicles. It offers a range of automotive products and services, including new vehicles, used vehicles, parts and automotive services, and automotive finance and insurance products. It operates in three segments: Domestic, Import and Premium Luxury."

Jim Chanos on China's Property Bubble & Renminbi Revaluation: Charlie Rose Interview

Noted short seller and Kynikos Associates hedge fund manager Jim Chanos recently sat down and had an interesting conversation with Charlie Rose regarding China and their impending property bubble (as he deems it). Previously, we'd covered Chanos' intriguing presentation on China overheating and this time around in his discussion with Rose, he focuses on China's currency, the Renminbi, as well as China's property market.

Turning specifically to the RMB, Chanos begins by saying that everyone expects this currency to be revalued upward. But he brings up an interesting point, wondering what will occur if the RMB actually *gasp* devalues? It's certainly food for thought as often times in markets when everyone is 'certain' something will go one way, it can have the tendency to head the opposite direction. If this devaluation were to happen, Chanos notes that the Chinese would actually then have an asset in all their US dollars. The hedge fund manager goes on to say, "well, they're going to need those dollars to in effect sterilize the banking system. And that was what we needed our currency reserves, by the way, in 1929, our pounds and gold reserves and what Japan needed in 1989."

So, it's definitely an intriguing notion to think about. But of course for this scenario to ultimately play out, you'll need some catalysts to pop the inherent bubble (i.e. RMB devaluation, etc). China is quite the hot topic these days in terms of global coupling/decoupling, property bubbles, and RMB revaluation among other talking points. We've also recently covered interesting research focused on the Asian powerhouse from Vitaliy Katsenelson in his presentation, China: The Mother of All Black Swans. But for thoughts on China's housing market, we defer to Chanos' recent conversation with Charlie Rose which you can watch below (click on the picture to be taken to the video clip):

And for those of you who may not be able to listen to audio at work, here is a transcript of the interview:

You can download the .pdf here.

A good conversation certainly. Be sure to also check out the original Jim Chanos China presentation that we posted up as well as Chanos' presentation on ten lessons from the financial crisis. All eyes are certainly on China now more than ever.

Tuesday, April 13, 2010

Alphaclone: Free 30 Day Trial for Hedge Fund Portfolio Replication & Backtesting

We've got exciting news that Alphaclone is now giving away a free 30 day trial for those interested. We use Alphaclone for all of our hedge fund portfolio tracking & replicating and highly recommend checking it out.

If you enjoy Market Folly and want to know what the top hedge funds are buying and selling then this is the hedge fund replicator for you. Probably the best feature of Alphaclone is that you can backtest various hedge fund strategies and combine managers to create your own fund of funds. Check it out for yourself and take advantage of the Alphaclone free trial here.

Long/Short Equity Hedge Funds Favoring Small Caps: Trend Report

We're back with the latest Bank of America Merrill Lynch hedge fund monitor report. This time around, we see that hedge funds have sold the Japanese yen down to the lowest levels since mid 2007. This comes after last week where we saw hedgies were starting to aggressively sell the Japanese yen. And just yesterday, we examined some Societe Generale research that found hedge funds were net short 10 year treasuries. Digging into the highlights of BofA's latest findings, we see that equity focused hedge funds have been favoring small cap stocks as the high beta rally marches on.

In equities there is a bit of a divergence between various hedge fund strategies. Market neutral funds have been bringing their market exposure above average (net long). Conversely, we see that long/short equity funds only have 30% net long exposure, well below their historical range of 35-40% net long. Where both of these fund strategies agree, however, is small cap names as both favor those types of stocks.

Based on CFTC data, large specs added to their shorts in S&P futures. Additionally, we see that hedgies were out aggressively buying gold and adding to their crowded long in copper. The crowded trade meme also continued in crude oil as many are long there. In currencies, the main takeaway is that hedgies continued to aggressively sell the yen down to the lowest levels since mid 2007. In interest rates, we see that funds are still very short the long end of the curve. They've modestly sold their 2 year treasury positions and still very much have the curve steepener trade on.

Year to date, event-driven and convertible arbitrage are the best performing fund strategies as a whole. This definitely confirms what we've seen from some first quarter hedge fund performance numbers. Dan Loeb's hedge fund Third Point (which often has event driven investments) leads the pack as one of the top performers this year so far.

Embedded below is Bank of America Merrill Lynch's latest hedge fund trend report:

You can download the .pdf here.

For more of our coverage of hedge fund trends and exposure levels, head to our posts on how hedge funds are net short ten year treasuries and have been selling the yen. If you want updates as to the specific stocks managers are investing in, head to our hedge fund portfolio tracking series.

Free TurboTax Online Federal

Just a quick reminder to everyone that the deadline to file taxes is rapidly approaching (April 15th) and those of you who are down to the wire on time can get TurboTax for free. While most of you probably have CPA's or already have this taken care of, we just wanted to make sure everyone remembered. But if you still have to file your taxes, you can at least get free TurboTax. After all, what better service to use than the one Treasury Secretary Timothy Geithner used haha.

How Inflation Begins

Raymond James Chief Investment Strategist Jeff Saut is out with his latest weekly missive and this time around he is addressing inflation. Right off the bat, he cites commodity prices that have increased by obscene amounts since January of 2009. Oil is up 118% and copper is up 185%. This is something we've touched on the past in a post about commodity inflation versus asset deflation. Below you will find Saut's investment strategy that details how inflation begins.

To illustrate his point, Saut turns to a first hand account from an industrial hardware importer. The story focuses on inventory levels and emphatically notes that they aren't all that busy on a business level, yet they are seeing prices skyrocket higher.

Saut writes, "Why are we so sure inflation will return? It is because for decades that has been the easiest political solution for the debt accumulation of our citizenry and our government. To wit, pay back the debt with 'cheaper' dollars. Given the recent geometric rise of debt, we see only three ways out for our government: sovereign default (unimaginable); severe economic contraction (unlikely); or, currency debasement (read: inflation)."

So, Saut feels that inflation is the method the government has selected and many won't disagree with that assertion. East Coast Asset Management recently came to the same conclusion in their deflation-reflation continuum research. The question then becomes: how do you protect from inflation? There are many ways to do so, and we'd point you toward Oaktree Capital's Howard Marks on how to play inflation. Also, legendary hedge funder Julian Robertson had been betting on higher interest rates via constant maturity swaps (CMS). We've of course seen plenty of hedge funds in the curve steepener trade. These investors are of course preparing for inflation because they share the same viewpoint as Saut.

Embedded below is the weekly investment strategy from Jeff Saut at Raymond James on how inflation begins:

You can directly download a .pdf here.

While many out there will agree with Saut's assertions, keep in mind that there are still some investors planted firmly in the deflation camp as well. So, it will be interesting to see how things eventually play out as a compromise of views would be deflation in the short-term followed by longer-term inflation. For a brief primer on this topic, head to investment scenarios of inflation versus deflation. And for more commentary from strategist Jeff Saut, you can view his past insight where he stated he was short-term cautious, long-term bullish.

Bruce Berkowitz's Fairholme Confirms AIG Position (13G Filing)

A few weeks ago, we covered that Bruce Berkowitz's Fairholme Fund (FAIRX) had started a stake in AIG (AIG). Well, we just got confirmation of this position via a 13G filing made with the SEC. Fairholme now owns 15,038,100 shares of AIG. While Berkowitz's fund currently shows over an 11% ownership stake in AIG, keep in mind that figure is pretty inflated as it does not reflect the appropriate percentage should the government convert their stake. If that happens, their ownership stake in the company would be diluted.

Also, while it is not disclosed directly in the filing, Berkowitz owns 20% of tranches of AIG's convertible debt and other AIG bonds. Back when he first mentioned the position, Berkowitz said Fairholme owned 13 million AIG shares, so it looks as if he's added over 2 million more shares since mid-March. Berkowitz will be speaking at the almost sold-out Value Investing Congress and we look forward to hearing his thoughts and latest investment ideas.

Taken from Google Finance, American International Group (AIG) is "a holding company, which through its subsidiaries, is engaged primarily in a range of insurance and insurance-related activities in the United States and abroad. AIG's four reportable segments include: General Insurance, Domestic Life Insurance & Retirement Services, Foreign Life Insurance & Retirement Services, and Financial Services."

You can view the rest of our coverage of Bruce Berkowitz's Fairholme Fund here.

Contrarian Indicator? Magazine Cover: America's Back!

Hat tip to Paul Kedrosky for flagging this. If you're into magazine covers as contrarian indicators, then the latest cover from Newsweek should be right up your alley:

(click to enlarge)

America's Back!

Monday, April 12, 2010

Seth Klarman's Baupost Group: Portfolio Update

Seth Klarman's hedge fund firm Baupost Group just recently filed a slew of disclosures with the SEC so let's break them down. Firstly, we'll start with the amended 13D and Form 4 regarding shares of Facet Biotech (FACT). As per the SEC filings, Klarman's fund sold 500,000 shares of FACT at a price of $26.96 on April 8th, 2010. After this transaction, Baupost Group is left with 1,500,000 shares of FACT (a 5.98% ownership stake in the company). In mid-March we noted that Baupost already sold some FACT shares, so this trend has continued. Remember that of course Facet Biotech saw a bid from Abbott Laboratories (ABT) to acquire the company for $27 per share, a 70% premium from where shares were trading before the bid.

Secondly, we see that Seth Klarman has filed an amended 13G on shares of ViaSat (VSAT). Due to activity on March 31st, 2010, we see that Baupost now shows a 22.05% ownership stake in the company with 8,706,700 shares. This is an increase over their previous stake in VSAT because back on December 31st when we looked at Baupost's portfolio, we saw that they owned 4,915,901 shares. This mean's they've increased their position by 77%, buying 3,790,799 more shares of VSAT.

Lastly, Baupost Group filed an amended 13G on shares of Theravance (THRX). Due to activity on March 31st, 2010, Klarman's firm now has a 20.44% ownership stake in THRX with 13,000,000 shares. This is an increase in their stake as they previously owned 10,100,000 shares back on December 31st when we examined Klarman's investments. Over the past three months, Baupost Group has increased their Theravance position by 28.7%, buying 2,900,000 more shares.

So, to wrap things up: Baupost Group sold some FACT, really boosted their stake in VSAT and then added to their THRX position as well. For more insight from this investment guru, check out Seth Klarman's lessons from the financial crisis. And as always, to see what other companies Klarman's firm is investing in, head to Baupost Group's portfolio.

Hedge Funds Net Short 10 Year Treasuries: Societe Generale Research

Societe Generale is out with their monthly hedge fund watch and we thought we'd highlight some of the takeaways of what they're seeing. Their research indicates that on a whole, hedge funds are very long the US dollar against the euro, UK pound sterling, and Japanese yen. Additionally, they are seeing funds long the Nasdaq and short bonds. This comes after we just recently saw Bank of America's research that hedgies were aggressively selling the yen.

One of the main talking points as of late has been that hedge funds have increased net shorts against 10 year treasuries. Curve steepeners have been a favorite trade of alternative investment managers and we've covered in the past how hedge fund Prologue Capital likes curve steepeners and how you can replicate legendary fund manager Julian Robertson's constant maturity swap play. As we just covered earlier this morning in Byron Wien's ten surprises for 2010, we saw that The Blackstone Group's Senior Managing Director sees yields on the 10 year rising to 5.5% or above. Below is a chart illustrating just how much short exposure hedgies have right now in long-term bonds:

(click to enlarge)

In currencies, hedgies continued to aggressively sell the euro and again this falls right in line with previous research we posted up that concluded that hedgies were re-shorting the euro. SocGen opines that hedgies are now net short 80,000 contracts. Turning to energy, we see that funds are long commodities and are very long oil, a commodity that has been looking to breakout. Hedge funds are also apparently still bullish on gold, despite reducing their net long positions it appears. You can view all of the hedge fund research on gold we've covered in the past as there's a plethora of resources.

Embedded below is Societe Generale's monthly hedge fund watch report in its entirety where you can examine their exposure levels across various asset classes:

You can directly download a .pdf here.

So, hedge funds in general seem to really be gravitating (i.e. crowding) three main trades right now: shorting long-term treasuries, shorting the euro, and going long oil. To see what other movements big hedge funds are making, head to our post on how they aggressively sold the Japanese yen and an in-depth look at how they had previously been re-shorting the euro. And for more market research specifically from Societe Generale, we've posted up their thoughts on gold as an insurance policy as well.

Jonathan Auerbach's Hound Partners Discloses Two Positions

We recently got a glimpse of two positions from Jonathan Auerbach's hedge fund Hound Partners. His firm filed two Form 4's with the SEC in regards to shares of Rancher Energy (RNCHQ) and Network-1 Security Solutions (NSSI). Before we dive into the data specifics, we need to preface this by saying that these filings were made to convey the re-balancing of positions amongst their various investment partnerships (i.e. shifting the stake between Hound Partners LP, Hound Partners Offshore Fund LP, & Hound Partners, LLC). So, as far as we can tell, they weren't actively buying and selling. However, these disclosures did give us a glimpse at two positions that did not appear when we previously looked at Hound Partners' portfolio. Those of you who want the Cliffs notes of all this should walk away just knowing that Hound has revealed that they own positions in both of these companies.

We're not quite sure how long Auerbach's hedge fund has owned these names for two reasons. Firstly, both of these companies trade in over the counter markets so they might not be deemed as reportable securities for purposes of 13F filings (the form we use to track hedge fund portfolios). Secondly, Hound owns warrants in both of these companies which don't necessarily show up in 13F's either. So, for all we know they could have owned these two warrant positions for quite some time. There's just no way for us to tell, so we can't deem these "new" positions. That said, we'll just dish out the facts here and hang with us as there are a lot of moving parts.

As per the Form 4, they shifted shares of Rancher Energy (RNCHQ) between their investment vehicles. After all was said and done, Hound Partners LP owned 3,909,067 shares, Hound Partners Offshore owned 5,581,228 shares, and Hound Partners LLC owned 1,071,502 shares. They also disclosed warrant positions in RNCHQ, again re-balancing between their various entities. The warrants have a conversion price of $1.5, a date excercisable of December 22nd, 2006 and an expiration date of December 22nd, 2011. These are common stock warrants and Hound Partners owns 986,970 worth. Hound Partners Offshore owns 1,409,161 worth, and Hound Partners LLC now owns 270,535 worth. Rancher Energy of course filed for chapter 11 reorganization in late October last year.

Secondly, Auerbach's hedge fund firm basically did the same thing with their Network-1 Security Solutions Position (NSSI). After all the re-shuffling was completed, Hound Partners LP owned 812,985 shares, Hound Partners Offshore owned 1,160,753 shares, and Hound Partners LLC owned 222,845 shares. Auerbach's firm also shows a position in warrants with a conversion price of $2, an exercisable date of April 16th, 2007 and an expiration date of April 16th, 2012. Hound Partners LP in total owns 400,957, Hound Partners Offshore owns 572,472 worth, and Hound Partners LLC owns 109,905 worth. Whew, got all that?

As we mentioned earlier, the main takeaway here is that we now know Hound Partners owns positions in these two companies, information we previously did not have when we started tracking them. Hound is a New York based firm that Auerbach started with assistance from legendary hedgie Julian Robertson. He is one of the many 'Tiger Seeds' that Robertson has sprouted up in an attempt to crank out a new round of successful investment managers. Auerbach of course previously worked for Robertson's Tiger Management.

Taken from Google Finance, Rancher Energy is "is an energy company engaged in the development, production and marketing of oil and gas in North America. The Company operates three fields in the Powder River Basin, Wyoming, which is located in the Rocky Mountain region of the United States."

Network-1 Security Solutions "is engaged in acquisition, development, licensing and protection of its intellectual property. The Company owns six patents issued by the United States Patent Office that relate to various telecommunications and data networking technologies (the Patent Portfolio) and include, among other things, patents covering the control of power delivery over local area networks (LANs) for the purpose of remotely powering network devices over Ethernet (PoE) networks and systems and methods for the transmission of audio, video and data over LANS."

For more from Jonathan Auerbach's firm, you can view our coverage of Hound Partners portfolio.

Blackstone Group's Byron Wien: Ten Surprises For 2010

Byron Wien, Senior Managing Director at The Blackstone Group pens an annual list of surprises each year and below are his predictions for 2010. Although the information was released earlier this year, many outlets just covered the bullet points of his predictions and not the entirety of his research presentation. As such, we wanted to post up the full piece for those interested. Wien of course was previously the Chief Investment Strategist at hedge fund Pequot Capital before they shut down. His list now joins the rest of our 2010 crystal ball coverage as we'd previously posted up Doug Kass' 2010 predictions as well as a prediction of the top 10 investment themes for 2010.

Here is the brief summary of Wien's 2010 predictions that you may have seen floating around the internet:

1. The US economy grows at a 5% real rate and unemployment drops below 9%.

2. The Federal Reserve hikes the fed funds rate to 2% by year-end.

3. Ten year treasury yields rise above 5.5%.

4. The US dollar rallies against the yen and the euro.

5. The S&P rallies to 1300 in the first half of the year, declines to 1000, then settles around 1115.

6. Japan becomes the best performing market.

7. President Obama endorses nuclear power development.

8. The Obama administration becomes energized via US economic improvement.

9. Financial service legislation will be passed (but in a softer form than originally feared).

10. Civil unrest in Iran peaks.

An interesting set of predictions from Wien, and you can already see how some of them are playing out like he predicted as the S&P marches higher and treasury yields have started to jump as well. We'll watch with interest to see if some of his second half of the year predictions come true. As always, take these with a grain of salt. Below is the presentation in its entirety from Wien and The Blackstone Group. It's chalk full of research that illustrates the macro factors he examined to draw his conclusions. Here is the embedded document:

You can directly download a .pdf here.

For more crystal ball gazing, check out the top 10 investment themes for 2010 as well as Doug Kass' 2010 predictions. And for those of you interested in some of Wien's previous work, we've posted some of his past market commentary while at hedge fund Pequot as well.