Friday, December 10, 2010

Free Sample: Full Issue Of Our Hedge Fund Wisdom Newsletter

If you haven't had a chance to check out's new quarterly newsletter, here's your chance. We're giving away a full past issue as a sample (75 pages). To receive a free sample issue of Hedge Fund Wisdom, please enter your email address below:

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This is the full version of our inaugural issue. Keep in mind that our newest issue features even more unique content since it is longer (84 pages), covers 3 additional hedge funds (Carl Icahn, Farallon Capital, & Viking Global) and also features a brand new section of "hedge fund quick pitches" that details hedge fund investment theses.

If you wish to subscribe to receive the newest issue, you can do so by clicking here.

What We're Reading ~ 12/10/10

Interview on hedge fund replication [NewRulesInvesting]

Examining Pershing's investment in JC Penney (JCP) [ActivistInvesting]

Further take on JCP from Todd Sullivan [ValuePlays]

StockTwits forges partnership with Yahoo Finance [HowardLindzon]

Don't call Ackman a hedge fund [Dealbook]

Do hedge funds do worse than the market? [CNBC]

High yield expectations for 2011 [DistressedDebtInvesting]

Sebastian Mallaby on SAC Capital [LATimes]

Will Tepper's golden touch work on tech stocks? [Reuters]

Watchlist of ten investment candidates [MarginOfSafety]

A profile of Harbinger's Phil Falcone [NYTimes]

Carlyle Group buys stake in hedge fund manager [FoxBusiness]

Bruce Kovner's Caxton Associates opens Sydney office [FT]

John Paulson's big moment [Dan's Hamptons]

Apple's (AAPL) big mistake [Forbes]

Thursday, December 9, 2010

Latest Thoughts From John Burbank & Passport Capital: 3Q Investor Letter

John Burbank's hedge fund firm Passport Capital provides a glimpse as to their overall portfolio positioning in its third quarter letter. Passport's Global Fund has returned 23.1% annualized since inception in August of 2000. At the end of the third quarter, the fund was up 7.9% year to date and the firm manages over $5 billion. Passport's largest net long exposures were in basic materials and consumer. Overall, they ended the third quarter 95% long, 39% short, leaving them with net exposure of 56%.

Top Holdings

At the end of the third quarter, Passport's top ten equity positions represented 33% of their assets under management (AUM). The top 10 holdings are sorted by percentage of net asset value (NAV):

1. Riversdale Mining (RIV): 10% of NAV
2. Microsoft (MSFT): 4%
3. Exxon Mobil (XOM): 4%
4. Las Vegas Sands (LVS): 3%
5. Financial Technologies (FTECH): 2%
6. Tarpon Investimentos (TRPN3): 2%
7. CF Industries (CF): 2%
8. Wendy's Arby's Group (WEN): 2%
9. Labrador Iron Mines (LIM): 2%
10. Jordan Phosphate Mines (JOPH): 2%

Keep in mind that we've also detailed the rest of Passport's portfolio.

Equity Update: Riversdale Mining (RIV.AU)

Given that Riversdale is Passport's largest holding, it makes sense that they singled out a portion of their letter to provide commentary. On Monday, Riversdale said it was in talks with Rio Tinto (RTP), which is offering AUD $15 per share for the company and RIV shares traded north of AUD $16 on the news (around 15% higher than where it was trading prior to the news). So, Passport has already made some nice money on this play and it will be interesting to follow the developments. Overall though, Burbank definitely advocates hard assets.

Physical Gold

Passport also mentions that 8% of the fund's NAV is in physical gold. The hedge fund firm owns 100,000 ounces of the precious metal stored in Zurich. They highlight various purchases by central banks as a bullish indicator. However, they are also partially concerned by the fact that some gold miners have been de-hedging. As a result, Passport delta hedged their entire gold position. For more hedge fund advocates of gold, head to our in-depth post on John Paulson's gold fund as well as David Einhorn's preference of physical gold.

Added Large-Cap Multinational Stocks

During the third quarter, Burbank's firm also bought high quality large cap companies. This is a prevalent theme we've seen in hedge fund portfolios as of late. Regarding this theme, Burbank writes:

"Recently, we have begun adding certain large-cap, multinational stocks to our portfolio. These are the same stocks that we largely avoided for the last ten years. What has changed? For one, many such companies have dividend yields of greater than 3% and "earnings yields" of 6-9%. Compared to "risk-free" 10-year Treasuries (yielding 2.5% at quarter end), these are quite appealing. While these companies' future earnings and dividends are uncertain, we think they are very likely to rise over time given strong franchises (predictable pricing and market share) and meaningful exposures to faster-growing emerging markets. We have sought out companies we believe are characterized by strong management teams, powerful competitive moats, healthy balance sheets, predictable cash flows, and healthy growth prospects."

Companies that they recently added include Exxon Mobil (XOM) and Microsoft (MSFT). Oaktree Capital's Howard Marks has said to buy high quality large-caps as well. And for a specific look at MSFT, T2 Partners' Whitney Tilson has put together his investment thesis on Microsoft.

Embedded below is Passport Capital's third quarter letter to investors:

You can download a .pdf copy here.

For analysis of Passport's US equity longs, head to the new issue of our Hedge Fund Wisdom newsletter. And for more thoughts directly from Passport's founder, head to his presentation from the Value Investing Congress.

Tuesday, December 7, 2010

David Einhorn Buys Sprint Nextel (S), Discusses His Other Positions: Interview

David Einhorn of $7 billion hedge fund firm Greenlight Capital was a guest host on CNBC's Squawk Box yesterday morning and provided us with updates on his long positions, short positions, macro views, and more. Einhorn has also been out promoting the new paperback version of his book, Fooling Some of the People All of the Time. It includes a foreword by Joel Greenblatt and a new epilogue with final details of the story's completion.

In his interview, Einhorn reveals that Greenlight Capital recently initiated a position in Sprint Nextel (S). The company has had a tumultuous past and he thinks it is poised for a turnaround, citing improved churn, reputation, handset offerings, and customer service. He also makes it a point to highlight Sprint's vast spectrum as he thinks Sprint can gain market share from such a vast network. Other than that though, Einhorn has found slim pickings in the market as he says things have been "pretty slow."

In terms of his other positions, Einhorn brings up his stake in CareFusion (CFN) that he's owned for a while as it spun-off from Cardinal Health (CAH). He sees CFN experiencing margin expansion in the future and as a play on growth in market share in the company's segment of medical devices. We penned an in-depth research report on CareFusion in our new issue of Hedge Fund Wisdom for those interested.

Einhorn has returned north of 21% annualized (net) and still likes his position in Apple (AAPL) but acknowledges that the company is by no means in the early stages of its growth as the stock has done remarkably well for some time. Regarding his stake in Pfizer (PFE), the Greenlight Capital manager is curious to see what direction the new CEO takes the company in but he still likes it as an investment due to its extremely low multiple.

Lastly, he reiterates that gold (physical, not the ETF) is his fund's largest position but still has yet to disclose just how much of the precious metal he owns. Much of what Einhorn revealed on CNBC, he largely already spoke about in his recent interview with Consuelo Mack which we also detailed.

However, the hedge fund manager did provide us with a few new tidbits yesterday. Turning to Greenlight Capital's latest exposure levels, Einhorn notes that he is typically pretty fully invested and doesn't necessarily hold a lot of cash on hand. At the present, he's about 30-35% net long which is just slightly below the long/short equity hedge fund historical averages of 35-40%.

Here's the video of Einhorn's interview and email readers will need to come to the site to view it:

Part 2 of Einhorn's interview follows with his thoughts on macro issues:

Part 3 details the Greenlight Capital manager's ability to spot red flags such as Lehman Brothers in November 2007 which he correctly identified, shorted, and profited from:

That wraps up another rare David Einhorn television interview. For an in-depth look at the rest of Einhorn's US equity longs, head to our newsletter. We've also posted up a plethora of resources related to Greenlight Capital detailed below:

- The short case on St. Joe (JOE)
- Einhorn's thesis on Vodafone (VOD)
- Greenlight's Q3 letter to investors

Pershing Square Gains 15% in November, Skeptics Emerge - A Lesson in Hedge Fund Tracking

Bill Ackman's hedge fund firm Pershing Square Capital Management returned 15% gross and 12.2% net for the month of November and has returned 35.5% gross and 27% net for 2010. Fantastic numbers, no? Given the somewhat outlandish results in one month, it's not necessarily a surprise that skeptics have emerged. It's perfectly acceptable to be skeptical/suspicious/curious given the cloud of secrecy that largely surrounds the hedge fund industry. However, when skeptics don't know how to track a hedge fund properly, their argument immediately loses credibility.

So, what's all the fuss about here? We hesitated even bringing this up for fear of drawing further attention to the article, but we couldn't bear it any longer. Earlier, Dealbreaker reported Pershing's performance numbers. Then, a site called Insider Monkey published an appalling article and the shit hit the fan. After "analyzing" the returns of Pershing Square's investments in November, Insider Monkey concludes that, "either Ackman made another secret investment which returned a gazillion percent or... Dealbreaker was duped."

First and foremost, any reader of Dealbreaker knows that the site posts performance updates directly from top hedge funds from time to time (i.e. printed on the hedge fund's letterhead). So, for Insider Monkey to insinuate that Dealbreaker posted up a 'duped' document is a bit asinine considering Bess Levin's pristine track record of posting authentic material. Bess is probably straight up laughing at Insider Monkey's insinuation. Next: onto the important stuff.

The crux of Insider Monkey's misstep is that they completely failed to assess Ackman's FULL portfolio. This highlights rule number one when tracking hedge funds: never rely solely on the 13F filing. If they had also read Ackman's various 13G's, 13D's and Form 4's filed with the SEC regarding Pershing's position in General Growth Properties (GGP), they would have realized where the bulk of the fund's performance came from and wouldn't have penned that nonsensical article.

A cursory look over the hedge fund's other SEC filings reveals that GGP emerged from bankruptcy on November 9th and obtained $6.8 billion in new equity capital and restructured $15 billion of debt. Pershing Square owned GGP equity and GGP unsecured debt. Additionally (and probably most importantly), Pershing Square purchased 46 million shares of new GGP at $10 per share and warrants as part of the restructuring (with shares now trading around $16).

So voilà, there's your answer. Insider Monkey was using a 13F filing that disclosed positions as of September 30th to determine a hedge fund's performance when one of the fund's main holdings saw a major corporate event a month after the 13F was filed, altering their position size. While Insider Monkey makes note of GGP's spin-off of the Howard Hughes Co (HHC), they completely fail to recognize the full extent of Ackman's position in the various securities of the company. Needless to say, Ackman owns much more GGP/HHC than what is reported on the latest 13F filing.

Not to mention, they completely omit the fact that Ackman holds other assets that SEC 13F filings don't require disclosure of. Assets falling into this category that Ackman owns include cash settled total return swaps and stock options, real estate hedges (via short sales and/or other non-disclosed positions), as well as a past position in BP (BP) credit default swaps. Lastly, Ackman could possibly hold various debt positions as well.

On their Seeking Alpha article, commenters have also pointed out Insider Monkey's misstep. What's comical is that after this revelation in the comments, Insider Monkey claims, "it looks like our conclusion is correct," referring to their conclusion that, "Ackman made another secret investment which returned a gazillion percent."

Umm, no
. There was NOTHING secret about this investment (or any other investment that could have contributed to Pershing's performance). Within our article alone, we've already linked to Ackman's updated aggregate economic exposure to GGP, his various stock options plays, as well as updates on all of his portfolio holdings. Again, it just goes back to Insider Monkey's complete lack of attention to detail. Had they simply read the various SEC filings made by Pershing not titled 13F, they would have found their answer as Ackman disclosed the extent of his aggregate economic exposure (and reason for the bulk of his strong performance) long ago.

So, what has Insider Monkey's folly taught us? It reinforced the fact that when tracking hedge funds, you have to take 13F filings with a grain of salt. Additionally, you have to track the full gamut of information (all SEC filings, investor letters, presentations, manager comments etc). This is what Market Folly strives to do on a daily basis. We simply wanted to use this as an opportunity to present a lesson in hedge fund tracking and why it's important to track MUCH more than just a fund's SEC 13F filing.

Based on this, we'll be launching a series of educational articles on the various aspects of hedge fund tracking and how to do it, so stay tuned! In the mean time, scroll through all of our coverage of hedge fund portfolios here and remember that is your go-to source for the full spectrum of hedge fund analysis.