Friday, June 4, 2010

What We're Reading ~ 6/4/10

Back to square one in the markets [Abnormal Returns]

And by the way, learn to love uncertainty in the markets too [Kirk Report]

Economic activity: Intermodal rail traffic hits a new high [Pragmatic Capitalism]

Don't feel so bad about your May performance [The Reformed Broker]

Slightly dated, but still a great in-depth look at the long case for Citigroup (C) [Kinnaras Capital]

Of course we just covered why Bill Ackman bought Citigroup [Market Folly]

From oil spills to opportunities [Street Capitalist]

Warren Buffett on the difference between gambling and speculating [WSJ MarketBeat]

Pershing Square finds bargain in General Growth Properties [Institutional Investor]

Hedge funds post biggest monthly loss since crisis [BusinessWeek]

A great interview with Ray Dalio of Bridgewater Associates [Barron's]

Icahn acquires Lawson Software stake [Reuters]

Teaser of an upcoming piece on Steven Cohen of SAC Capital [Vanity Fair]

Thursday, June 3, 2010

Hedge Funds Reduce Risk: Very Low Net Long Equities Exposure

Given the recent market downturn and ramp up in volatility, it should come as no surprise that hedge funds have been unwinding risk as of late. Bank of America Merrill Lynch's newest hedge fund monitor report gives us a look at their exposure levels and we see that long/short equity funds have very low net long exposure. However, they have been boosting exposure to inflation plays, growth, and emerging markets. Based on CFTC data, l/s funds reduced gross exposure by selling long positions but also by covering shorts in the S&P 500 and Russell 2000. The majority of longs they sold came from the Nasdaq 100 which would seem to indicate that hedgies were broadly favoring technology names. This would largely coincide with what we've seen from Goldman Sachs' VIP list of stocks that matter most to hedge funds.

Long/short funds are only 18% net long, significantly below the historical average of 35-40%. They are currently favoring growth and high quality stocks, something we've already seen evidence of in our hedge fund portfolio tracking series. And as mentioned above, they've also started to move significantly into emerging markets plays over the course of the last month. Depending on the region, this could possibly tie into the fact that these funds overall have positive inflation expectations. Lastly, we see that l/s funds reduced their already low market exposure a bit more over the past week.

Market neutral funds, on the other hand, are net long equities but have reduced small cap exposure. Surprisingly enough, despite their net long position they managed to escape the month of May largely unscathed. These funds have generally favored value names and have increased that lean over the past few weeks. Market neutral funds also have negative inflation expectations and have been in many 'low quality' names.

Global macro funds bought 10 year treasuries last week and then also aggressively covered their net short US dollar positions. Bank of America Merrill Lynch also points out that these funds have been shorting emerging markets but are still net long the EAFE. This is an interesting dynamic as you have l/s funds ramping up long exposure there and conversely global macro funds increasing short exposure. Lastly, we saw that overall hedgies were covering shorts in the Japanese yen, selling crude oil, and covering crowded shorts in natural gas.

In terms of performance, the month of May was brutal for hedge funds and as a whole they lost 3% throughout the majority of the month. While that may seem tame compared to the market indices, there are definitely some outliers. We saw recently that Shumway Capital Partners' Sakkonet Fund lost around 10%, Eddie Lampert's ESL Investments was down 15%, Chris Hohn's The Children's Investment Fund lost 9% and Andreas Halvorsen's Viking Global was down 4.2%. As evidenced by some of the figures above, it should come as no surprise that long/short equity was the worst performing strategy of the month as funds were overall down 5.13% through the majority of May.

Back in early May, we discovered that global macro funds were net short equities and in the weeks prior to that we saw the smart money was selling equities. So, some funds were definitely able to head off the stampede to the exits. But as you can see from above, some of the carnage was still not pretty. Embedded below is the entire Bank of America Merrill Lynch hedge fund monitor report:

You can download a .pdf copy here.

So, while we definitely signs of funds heading for the exits before this most recent downturn, many hedgies were still blindsided. It's an interesting dynamic when you see hedge fund managers talking about how 2010 will be great for stockpicking and short selling opportunities, yet long/short equity was the worst performing strategy last month. For more on the most important stocks to hedge funds, head to Goldman Sachs VIP list. And to see some of the latest ideas from fund managers, check out the Ira Sohn Investment Conference recap as well as our daily portfolio tracking series.

Wednesday, June 2, 2010

Hedge Fund Shumway Capital Partners Adds Large New Stakes in Kraft Foods, Comcast (13F Filing Q1 2010)

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund filings.)

Next up is Chris Shumway's hedge fund Shumway Capital Partners. Prior to founding his firm, Shumway was previously one of Julian Robertson's right-hand men at legendary hedge fund Tiger Management. As such, he joins the other successful Tiger Cubs and is included in the Tiger Cub portfolio created with Alphaclone for hedge fund replication. Shumway Capital Partners focuses on intensive fundamental research to drive their long/short equity strategy. Back in 2009, Shumway was listed in Barron's top 100 hedge funds for 2009 with a rolling 3-year annualized return of 28%. However, 2010 has proven difficult for the firm as their Sakkonet Fund was down 10% in May after they had gained 4.3% through April. Shumway received his MBA from Harvard Business School and his undergraduate degree from the University of Virginia.

The positions listed below were their long equity, note, and options holdings as of March 31st, 2010 as filed with the SEC. All holdings are common stock unless otherwise denoted:

Brand New Positions
Kraft Foods (KFT)
Comcast (CMCSA)
Air Products & Chemicals (APD)
Bank of America (BAC)
General Dynamics (GD)
Bard (BCR)
Staples (SPLS)
Liberty Global (LBTYA)
CME Group (CME)
Comcast (CMCSK)
TD Ameritrade (AMTD)
Illumina (ILMN)
Lowe's (LOW)
Discovery Communications (DISCA)
Cablevision (CVC)
Hartford Financial (HIG)
Sigma Aldrich (SIAL)
Waters (WAT)
Annaly Capital Management (NLY)
Credit Suisse (CS)
Liberty Global (LBTYK)
Illinois Toolworks (ITW)
SBA Communications (SBAC) Notes

Increased Positions
Novo (NVO): Increased position size by 413.8%
Goldman Sachs (GS): Increased by 275.4%
Baidu (BIDU): Increased by 85.4%
Apple (AAPL): Increased by 62.4%
Cisco Systems (CSCO): Increased by 57.2%
Disney (DIS): Increased by 47.6%
PNC Financial (PNC): Increased by 32.2%
Ingersoll-Rand (IR): Increased by 28.5%
Pfizer (PFE): Increased by 21.1%

Reduced Positions
Wells Fargo (WFC): Reduced position by 74.7%
Omnicom Group (OMC): Reduced by 70.8%
Juniper Networks (JNPR): Reduced by 62.4%
Pepsico (PEP): Reduced by 61.4%
Las Vegas Sands (LVS): Reduced by 60.2%
Urban Outfitters (URBN): Reduced by 57.9%
St Jude Medical (STJ): Reduced by 54.8%
Ctrip (CTRP): Reduced by 53.7%
JPMorgan Chase (JPM): Reduced by 45.8%
Gap (GPS): Reduced by 41.9%
Mastercard (MA): Reduced by 36.4%
Johnson & Johnson (JNJ): Reduced by 24.7%
Quest Diagnostics (DGX): Reduced by 22.9%
Visa (V): Reduced by 22.6% (CRM): Reduced by 15.4%

Positions They Sold Out of Completely
Qualcomm (QCOM)
Qualcomm (QCOM) Calls
Select Sector Financials (XLF) Calls
Freeport McMoran (FCX)
Brocade Communications (BRCD)
Colgate Palmolive (CL)
CVS Caremark (CVS)
Radioshack (RSH)
Memc Electronics (WFR)
Fifth Third (FITB)
Allstate (ALL)
Monsanto (MON)
Research in Motion (RIMM)
NII Holdings (NIHD) Notes
Kinross Gold (KGC) Notes
BioMarin Pharmaceutical (BMRN) Notes

Top 15 Holdings (by percentage of assets reported on 13F filing)

1. Apple (AAPL): 9.5%
2. Disney (DIS): 5.8%

3. Cisco Systems (CSCO): 5.3%
4. Kraft Foods (KFT): 5.3%
5. Teva Pharmaceuticals (TEVA): 5.3%
6. Pfizer (PFE): 4.6%
7. Equinix (EQIX): 4.5%
8. Goldman Sachs (GS): 3.9%
9. Time Warner (TWX): 3.7%
10. Johnson & Johnson (JNJ): 3.5%
11. Comcast (CMCSA): 2.7%
12. Visa (V): 2.5%
13. Baidu (BIDU): 2.4%
14. Mastercard (MA): 2.2%
15. JPMorgan Chase (JPM): 2.1%

Shumway's biggest portfolio change was their new position in Kraft Foods (KFT) as it is now their fourth largest US equity long. Numerous other hedgies like KFT these days, including Bill Ackman who previously detailed his investment thesis on Kraft. Additionally, Shumway started quite a sizable stake in Comcast (via CMCSA and CMCSK). They were also out adding to some of their mainstay holdings such as Apple, Cisco Systems, Disney, and Pfizer.

We also wanted to point out that their Equinix (EQIX) position listed above is only their equity stake. Shumway also holds various notes and their aggregate exposure to EQIX actually makes it one of their largest positions (slightly smaller than the size of their CSCO stake). And if you hadn't already noticed, many stocks in their portfolio are those on Goldman Sachs' VIP list of stocks most important to hedge funds. Maybe that helps explain their poor performance in the month of May.

On the selling side of things, Shumway Capital Partners was also somewhat active. In the fourth quarter of 2009, we saw that Shumway was betting big on Wells Fargo (WFC). Well, that certainly changed quickly as they dumped almost 75% of their position in the first quarter of 2010. However, in the financial sector they added to their stakes in Goldman Sachs and PNC Financial. Additionally, they sold completely out of hedge fund favorite stocks Qualcomm, EMC, Research in Motion and Freeport McMoran. It was also interesting to see Shumway sell out of CVS Caremark as we've seen some other hedge fund managers bullish on CVS shares as of late.

Assets reported on Shumway's 13F filing were $7.9 billion this quarter. Data from the SEC is aggregated and sorted automatically by Alphaclone, our source for hedge fund tracking, replicating, and performance backtesting (Market Folly readers can receive a special free 14 day trial). Remember that these filings are not representative of the hedge fund's entire base of AUM.

This post is part of our daily hedge fund portfolio tracking series. We've already detailed activity from numerous managers so click the links below to be taken to the respective portfolio updates: Seth Klarman's Baupost Group, Warren Buffett's Berkshire Hathaway, Stephen Mandel's Lone Pine Capital, and Bill Ackman's Pershing Square, David Einhorn's Greenlight Capital, Eddie Lampert's RBS Partners, David Tepper's Appaloosa Management, Mohnish Pabrai's Investment Fund, John Griffin's Blue Ridge Capital, Lee Ainslie's Maverick Capital, Bruce Berkowitz's Fairholme Capital Management, Andreas Halvorsen's Viking Global, Dan Loeb's Third Point, John Paulson's hedge fund Paulson & Co, Chase Coleman's Tiger Global, Roberto Mignone's Bridger Management, Phil Falcone's Harbinger Capital Partners, and David Stemerman's Conatus Capital. Be sure to check back daily for new hedge fund updates.

Tuesday, June 1, 2010

Why Bill Ackman Bought Citigroup (C)

Last week we detailed a summary of investment ideas from various hedge fund managers at the Ira Sohn Conference. Pershing Square's Bill Ackman was one of the many speakers and though he ran out of time in his presentation, he did briefly mention he had purchased 150 million shares of Citigroup (C). Ackman was then recently interviewed by Yahoo TechTicker to talk about Christine Richard's new book which he is the subject of, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff. However, TechTicker also had the chance to ask him about his new purchase.

Ackman was actually surprised when he took this stake because back in the throngs of the crisis he could never see himself owning a financial company only twelve months later. Keep in mind that the US government recently announced the sale of 1.5 billion shares of Citigroup (C) and they have plenty more to sell. This fact has acted as somewhat of an overhang on the stock. But Ackman certainly isn't bashful and dove right in.

While Ackman fully admits that Citigroup is still working through their problems, he sees them as one of the "best capitalized banks" out there currently due to the conversion of the government's preferred stake. Elaborating on this thesis, Ackman thinks the zero rate interest policy is benefiting the bank as they are earning very attractive spreads. Lastly, he loves their solid balance sheet backed by a huge deposit base. So, it definitely sounds as though he believes he's buying a proven franchise in recovery mode. For the rest of Ackman's investments, we've detailed Pershing Square's portfolio.

Ackman isn't the only prominent hedgie who recently bought shares either. Phil Falcone's Harbinger Capital Partners recently disclosed a new massive stake in Citigroup. Not to mention, John Paulson's hedge fund owns a large position as well. At the same time though, we also saw Dan Loeb's Third Point exit C in the first quarter, Lee Ainslie's Maverick Capital dump their position and Andreas Halvorsen's Viking Global also sold out, so not everyone out there is bullish on Citi. David Tepper's Appaloosa Management trimmed over half of their stake in C, but it is still one of their largest equity positions. Overall though, Citigroup is still one of the most important stocks to hedge funds as determined by Goldman Sachs' VIP list.

Shifting back to Ackman's thoughts on the market overall he said, "Look at large-cap, very high quality businesses today [and] they seem pretty cheap to me." Embedded below is Ackman's video interview from TechTicker:

His overall sentiment that mega cap stocks are undervalued is a common belief held by numerous investment managers. At the Ira Sohn, Jeremy Grantham also said to buy high quality stocks as well because the massively momentous market rally of 2009 largely left higher quality names behind as managers re-risked and favored stocks of lower quality. Ackman thinks Citigroup is one of those high quality names and is bullish on shares, despite the impending sale of the government's stake. We'll definitely keep an eye on this one to see how it turns out. For more of the latest moves from prominent investment managers, head to notes from the Ira Sohn Conference as well as our daily hedge fund tracking series.

Hedge Fund Bridger Management Boosts iStar Financial (SFI) Position

In a 13G filed with the SEC due to activity on May 20th, Roberto Mignone's hedge fund Bridger Management has disclosed an updated stake in iStar Financial (SFI). Per the filing, Bridger now shows a 5.6% ownership stake with 5,190,000 shares. This is a slight increase in their position because Mignone's hedge fund owned 4,690,000 as of March 31st when we detailed Bridger's portfolio. This means that over the past two months, they've added an additional 500,000 shares (a 10.66% boost in position size).

Mignone received his degree from Harvard and his MBA from Harvard Business School. He founded Bridger after previously founding Blue Ridge Capital with John Griffin and working at Julian Robertson's Tiger Management before that. In terms of other recent portfolio activity from his hedge fund, Mignone recently revealed two new positions. Additionally, we'd previously detailed some of his investment thoughts for 2010 from a hedge fund panel.

Taken from Google Finance, iStar Financial is a "finance company focused on the commercial real estate industry. The Company primarily provides financing to high-end private and corporate owners of real estate, including senior and mezzanine real estate debt, senior and mezzanine corporate capital, as well as corporate net lease financing and equity."

For more of Mignone's investments, head to our coverage of Bridger's portfolio.

Hedge Fund Eton Park Increases Position in Airgas (ARG), Bets on Takeover

Due to activity on May 21st, 2010, Eric Mindich's hedge fund Eton Park Capital has disclosed an updated position in Airgas (ARG). Per a 13D filed with the SEC, we learn that Eton Park now has a 7.27% ownership stake in the company with 6,014,200 shares. This is an increase in their position as back on March 31st, 2010 they owned 3,910,000 shares. So, over the past two months, Mindich's firm has added 2,104,200 shares (a 53.8% increase in their position size). They spent $370 million to acquire the additional exposure and the filing did mention that part of this transaction was conducted on margin.

This makes Eton Park the second largest shareholder of Airgas (ARG), a company which recently received a buyout offer from Air Products & Chemicals (APD) for $60 per share. Eton is obviously wagering that Air Products & Chemicals will increase their offer as shares of Airgas are currently trading around $62, above the $60 offer price. Please also keep in mind that since Eton Park is an arbitrage focused fund, they most likely have hedged this position somehow (possibly via shorting shares of Air Products). They are not required to disclose short positions so we will not be able to see the other part of this trade they could theoretically have on.

For other recent investments from Eric Mindich's hedge fund, check out Eton Park's new position in Cohen & Company (COH) as well as their new stake in Sable Mining (SBLM). And for more of our coverage on Mindich, we recommend checking out some of his thoughts on whether or not there is alpha in asset allocation at a previous hedge fund panel.

Taken from Google Finance, Airgas is "a distributor of industrial, medical and specialty gases (delivered in packaged or cylinder form), and hardgoods, such as welding equipment and supplies. Airgas is a producer of nitrous oxide in the United States, the liquid carbon dioxide producer in the Southeast, the producer of atmospheric merchant gases in North America and a distributor of process chemicals, refrigerants, and ammonia products."

For the latest investments from prominent managers, head to our hedge fund portfolio tracking series.