Top 10 Biggest Hedge Funds in 2010

AbsoluteReturn+Alpha is out with its 2010 year-end survey of the top ten hedge funds in the Americas. Their findings show that American hedge funds manage a combined $1.297 trillion, up 10% from the year prior. However, this still falls short of the 2008 peak level of $1.675 trillion before the financial crisis.

The Top Ten Hedge Funds in the Americas

1. Bridgewater Associates: $58.9bn AUM
2. JPMorgan Asset Management: $45.5bn
3. Paulson & Co: $36bn
4. Soros Fund Management: $27.9bn
5. Och-Ziff Capital Management: $27.6bn
6. BlackRock: $26.6bn
7. Baupost Group: $23.4bn
8. Angelo, Gordon & Co: $22bn
9. Farallon Capital Management: $21.5bn
10. King Street Capital Management: $19.9bn


Possibly the most astonishing fact here is that in 2010 the big... got even bigger. Ray Dalio's Bridgewater Associates increased its AUM by $15.3 billion. Dalio gave a rare interview yesterday that's definitely worth listening to. His Pure Alpha Fund II gained 44.8% last year, quite the performance when you compare it to other 2010 hedge fund returns.

Of the hedge funds featured on the list, we provide updates on the portfolio activity of four of them:

- Seth Klarman's Baupost Group has been active in commercial real estate and we just posted up an excerpt from his year-end investor letter.

- Paulson & Co has been focusing on restructured equities as noted in their year-end letter.

- Farallon Capital focuses on risk arbitrage and their investments have been featured in our newsletter.

- You can also view the latest portfolio activity from Soros Fund Management here.

Bridgewater's Ray Dalio: Rare Interview

Ray Dalio of $58.9 billion hedge fund Bridgewater Associates gave a rare television interview yesterday on CNBC so we wanted to feature his comments on a myriad of topics. His Pure Alpha II fund returned 44.8% last year and is the largest hedge fund firm in America.

On the topic of US equities, Dalio said that they, "first are still comparatively cheap. But more importantly, the flows are beneficial to them because US equities benefit from currency depreciations. I think, as I say in 2012, the developed countries' currencies will devalue in relationship to the emerging countries' currencies."

So, it appears as though Dalio sees equities benefiting, at least in the near-term. The last time we saw Dalio's elongated comments on markets back in February 2009, he was claiming it would soon be the "buying opportunity of the century" and he was right.

His thoughts on weakening currencies are intriguing given that he also thinks gold is under-appreciated here. This is largely the thesis John Paulson's gold fund is predicated upon, so they share this viewpoint. Dalio thinks gold should garner at least a portion of your portfolio, at the very least for diversification and risk reduction purposes.

Dalio also had a good quote on the topic of thinking for yourself, saying, "in order to make money in the market you have to be an independent thinker. And I think also creative, you have to be willing to make mistakes. And so the process is that anybody in the company, if anything doesn't make sense to them, that they can bring up what doesn't make sense to them in a non-hierarchical way and look at whether it's true or not and what we should do about it. We particularly like looking at mistakes or weaknesses that we have in order to get stronger."

He raises a good point and many prudent investors have honed in on learning from mistakes over the years.


Embedded below is Dalio's interview (email readers will need to come to the site to view):



For thoughts from more great hedge fund investors, today we've also posted up an excerpt from Seth Klarman's 2010 year-end letter.

Seth Klarman & Baupost Group's 2010 Letter Excerpt

Thanks for MyInvestingNotebook for highlighting that legendary investor Seth Klarman and his firm, Baupost Group, are out with their 2010 year-end letter. Courtesy of VII, below is an excerpt from their letter. We're going to warn you that it is very long, but a must-read:

"Two problems are upon us at once: short-term stimulus that is unaffordable over the long run and runaway entitlements that must be reined in. But restoring fiscal sanity will be bad for the economy and financial markets. What Treasury official or politician would want the cash spigot turned off before a recovery is certain? Recipients of government handouts – a large percentage of the population – would grumble at the termination of policies that offer them outsized benefits. So prepare for a chorus of "but not yet.” One already sees this in editorials and commentaries, such as the ones saying it's time to close down bankrupt Fannie Mae and Freddie Mac, but not yet, because doing so would harm the still-weak housing market. There will never be a good time to end housing support programs, reverse quantitative easing policies, end fiscal stimulus, or reduce massive budget deficits – because doing so will restrict growth and depress share prices. Nor will there be a good time to cut entitlement programs or to solve Social Security or Medicare underfunding. All will agree the stimulus cannot go on forever, that excessive entitlements must be reined in, “but not yet."

The financial collapse of 2008 highlighted our national predicament. The sudden decline in consumer activity that followed the plunges in the housing and stock markets represented a reasonable – indeed a desirable – response to overindebtedness. Yet the federal government saw this well-advised retrenchment as cataclysmic, because the national economy had grown dependent on our living beyond our means. The imagination of our financial leaders remains so shallow that their response to a crisis caused by overleverage and excess has been to recreate, as nearly as possible, the conditions that fomented it, as if the events of 2008 were a rogue wave of financial woe that can never recur. It is only in Fantasyland that the solution to vastly excessive debt is more debt and the answer to overconsumption is less saving and more spending. Worse still, we have yet to see a serious assessment by policymakers of the causes of the 2008 financial market and economic collapses so that we might take action to ward off a repeat performance. The government’s knee-jerk response to contraction was to prop up economic activity by any and every means possible; the hole in consumer activity had to be materially repaired on the government tab. While Treasury Secretary Timothy Geithner ingenuously professes a belief that the U.S. will never lose its AAA rating, Moody's recently warned that, absent a change, a downgrading could be just around the comer. Or, in the words of David Letterman, "I heard the U.S. debt may now lose its triple-A rating. And I said to myself, well who cares what the auto club thinks."

Most of us learned about the Great Depression from our parents or grandparents who developed a "Depressionmentality," by which for decades people shunned leverage, embraced thrift, and thought twice before quitting their secure jobs to join risky ventures. By bailing out the economy rather than allowing the pain of the economic and market collapses to be felt, the government has endowed our generation with a "really-bad-couple-of-weeks-mentality": no lasting lessons are learned; the government endlessly intervenes in the economy, and, ironically, the first thing to strongly rebound from the 2008 collapse isn't jobs or economic activity but speculation.

Benjamin Graham's margin-of-safety concept – to invest at a sufficient discount so that even bad luck or the vicissitudes of the business cycle won't derail an investment – is applicable to the economy as a whole. Bridges intended for ten-ton trucks are overbuilt by engineers to hold vehicles of 30 tons. Responsible investors assume their best judgments will sometimes go awry and insist on bargain purchases that allow room for error. Likewise, an economy built with no margin of safety will eventually implode. Governments that run huge deficits, promise entitlements that will be next-to impossible to deliver, and depend on the beneficence of foreigners to stay afloat inevitably must collapse – perhaps not imminently but eventually, as Greece and Ireland have recently discovered.

It is clear, both in the financial markets and in government policy, that no long-term lessons have been drawn from the events of 2008. A friend recently posited that adversity is valuable not for what it teaches but for what it reveals. The current episode of financial adversity reveals some unpleasant truths about the character and will of our country and its leaders, and offers an unpleasant picture of the future that awaits, unless we quickly find a way to change course.

The Demonization of Short-Seller

While we rarely sell securities short – both because of the degree of execution difficulty and theoretically unlimited risk compared to limited potential return – we do believe that short-selling serves a vitally important function. Markets, of course, fluctuate; driven by human emotion, greed, and fear, they can reach significantly overvalued levels. This is bad, both because it can induce some who cannot afford losses to speculate, and because it can lead to an improper allocation of society's resources. The recent housing bubble illustrates the problem: excessive home prices led to excessive home building, eventually resulting in a price collapse, large loan losses, and great personal hardship. In addition, the decline that follows periods of market overvaluation is bad for the broader economy, for confidence, and for rational decision making; it also frequently triggers government intervention in markets, with all of its inevitable distorting effects. Just as value buyers can dampen downside volatility, short-sellers can dampen the upside excesses. They don't actually change the eventual outcomes, just help us get there sooner. This makes short-sellers unpopular, as the uninformed masses enjoy high and rising securities prices for the short-term profits they produce, without understanding the societal costs of the future reversal. The less you understand valuation, the more that overvaluation seems like a free lunch – which of course it isn't.

From our experience, much long-oriented analysis is simplistic, highly optimistic, and sloppy. Short-sellers, by going against the long-term tide of economic growth and the short-term swells of public opinion and margins calls, are forced to be crackerjack analysts. Their work product is usually top-notch and needs to be. Short-sellers shouldn't be reviled or banned; most should be celebrated and encouraged. They are the policemen of the financial markets, identifying frauds and cautioning against bubbles. In effect, they protect the unsophisticated from predatory schemes that regulators and enforcement agencies don't seem able to prevent.

Moreover, the short-seller who is fundamentally wrong, who mistakenly sells short an undervalued security, will lose money and, if the pattern continues, will eventually go broke. Short-sellers, like long-only buyers, need to be right more than they are wrong; when they are right, their actions are socially beneficial, not harmful. The only exception to this point, the only danger short-sellers pose to society, is when, in the equivalent of yelling "fire" in a crowded theatre, they spread false rumors that prevent a company that needs regular financing (such as brokerage firms) from being funded. Then, their predictions become self-fulfilling prophecies, enabling them to profit, whether or not they were fundamentally correct; they may actually be able to change the outcome. Yet, even in this situation, one may wonder whether any company – or highly leveraged government, for that matter – should employ a funding model that depends on perpetual access to the capital markets, which are notoriously fickle, volatile, subject to the influence of malicious gossip, and short-term oriented. In any event, mechanisms such as the uptick rule and rules against market manipulation already exist to prevent such misbehavior by short-sellers.

A Framework for Investment Success

Two elements are vital in designing an investment approach for long-term success. First, answer the question, ''what's your edge?" In highly competitive financial markets, with thousands of very smart, hardworking participants, what will enable you to reliably outperform the field? Your toolkit is critically important: truly long-term capital; a flexible approach that enables you to move opportunistically across a broad array of markets, securities, and asset classes; deep industry knowledge; strong sourcing relationships; and a solid grounding in value investing principles.

But because investing is, in many ways, a zero-sum activity in which your returns above the market indices are derived from the mistakes, overreactions or inattention of others as much as from your own clever insights, there is a second element in designing a sound investment approach: you must consider the competitive landscape and the behavior of other market participants. As in football, you are well-advised to take advantage of what your opponents give you: if they are defending the run, passing is probably your best option, even if you have a star running back. If scores of other investors are rigidly committed to fast-growing technology stocks, your brilliant tech analyst may not be able to help you outperform. If your competitors are not paying attention to, or indeed are dumping, Greek equities or U.S. housing debt, these asset classes may be worth your attention, regardless of the currently poor fundamentals that are driving others' decisions. Where to best apply your focus and skills depends partially on where others are applying theirs.

When observing your competitors, your focus should be on their approach and process, not their results. Short-term performance envy causes many of the shortcomings that lock most investors into a perpetual cycle of underachievement. You should watch your competitors not out of jealousy, but out of respect, and focus your efforts not on replicating others' portfolios, but on looking for opportunities where they are not.

Much of the investment business is centered around asset-gathering activities. In a field dominated by a short-term, relative performance orientation, significant underperformance is disastrous for retention of assets, while mediocre performance is not. Thus, because protracted periods of underperformance can threaten one's business, most investment firms aim for assured, trend-following mediocrity while shunning the potential achievement of strong outperformance. The only way for investors to significantly outperform is to periodically stand far apart from the crowd, something few are willing or able to do.

In addition, most traditional investors are limited by a variety of constraints: narrow skill-sets, legal restrictions contained in investment prospectuses or partnership agreements, or psychological inhibitions. High-grade bond funds can only purchase investment-grade bonds; when a bond falls below BBB, they are typically forced to sell (or think that they should), regardless of price. When a mortgage security is downgraded because it will not return par to its holders, a large swath of potential purchasers will not even consider buying it, and many must purge it. When a company omits a cash dividend, some equity funds are obliged to sell that stock. And, of course, when a stock is deleted from an index, it must immediately be dumped by many. Sometimes, a drop in a stock's price is reason enough for some holders to sell. Such behavior often creates supply-demand imbalances where bargains can be found. The dimly lit comers and crevasses existing outside of mainstream mandates may contain opportunity. Given that time is often an investor's scarcest resource, filling one’s in-box with the most compelling potential opportunities that others are forced to or choose to sell (or are constrained from buying) makes great sense.

Price is perhaps the single most important criterion in sound investment decision making. Every security or asset is a "buy" at one price, a “hold” at a higher price, and a "sell" at some still higher price. Yet most investors in all asset classes love simplicity, rosy outlooks, and the prospect of smooth sailing. They prefer what is performing well to what has recently lagged, often regardless of price. They prefer full buildings and trophy properties to fixer-uppers that need to be filled, even though empty or unloved buildings may be the far more compelling, and even safer, investments. Because investors are not usually penalized for adhering to conventional practices, doing so is the less professionally risky strategy, even though it virtually guarantees against superior performance.

Finally, most investors feel compelled to be fully invested at all times – principally because evaluation of their performance is both frequent and relative. For them, it is almost as if investing were merely a game and no client's hardearned money was at risk. To require full investment all the time is to remove an important tool from investors' toolkits: the ability to wait patiently for compelling opportunities that may arise in the future. Moreover, an investor who is too worried about missing out on the upside of a potential investment may be exposing himself to substantial downside risk precisely when valuation is extended. A thoughtful investment approach focuses at least as much on risk as on return. But in the moment-by-moment frenzy of the markets, all the pressure is on generating returns, risk be damned.

What drives long-term investment success? In the Internet era, everyone has a voluminous amount of information but not everyone knows how to use it. A well-considered investment process – thoughtful, intellectually honest, teamoriented, and single-mindedly focused on making good investment decisions at every turn – can make all of the difference. Investors with short time horizons are oblivious to kernels of information that may influence investment outcomes years from now. Everyone can ask questions, but not everyone can identify the right questions to ask. Everyone searches for opportunity, but most look only where the searching is straightforward even if undeniably highly competitive.

In the markets of late 2008, everything was for sale as investors were caught in a contagion of selling due to panic, margin calls, and investor redemptions. Even while modeling very conservative scenarios, many securities could have been purchased at extremely attractive prices – if one had capital with which to buy them and the stamina to hold them in the face of falling prices. By late 2010, froth had returned to the markets, as investors with short-term relative performance orientations sought to keep up with the herd. Exuberant buying had replaced frenzied selling, as investors purchased securities offering limited returns even on far rosier economic assumptions.

Most investors take comfort from calm, steadily rising markets; roiling markets can drive investor panic. But these conventional reactions are inverted. When all feels calm and prices surge, the markets may feel safe; but, in fact, they are dangerous because few investors are focusing on risk. When one feels in the pit of one's stomach the fear that accompanies plunging market prices, risk-taking becomes considerably less risky, because risk is often priced into an asset's lower market valuation. Investment success requires standing apart from the frenzy – the short-term, relative performance game played by most investors.

Investment success also requires remembering that securities prices are not blips on a Bloomberg terminal but are fractional interests in – or claims on – companies. Business fundamentals, not price quotations, convey useful information. With so many market participants fixated on short-term investment performance, successful investing requires a focus not on how one is doing, but on corporate balance sheets and income and cash flow statements.

Government interventions are a wild card for even the most disciplined investors. On one hand, the U.S. government has regularly intervened in markets for decades, especially by lowering interest rates at the first sign of bad economic news, which has the effect of artificially inflating securities prices. Today, monetary easing and fiscal stimulus augment consumer demand, increasing risks not only regarding the integrity and sustainability of securities prices but also those surrounding the sustainability of business results. It is hard for investors to get their bearings when they cannot readily distinguish durable business performance from ephemeral results. Endless manipulation of government statistics adds to the challenge of determining the sustainability – and therefore the proper valuation – of business performance. As securities prices are propped up and interest rates are manipulated sharply lower (thereby justifying those higher prices in the minds of many), prudent investors must demand a wide margin of safety. This is especially so because financial excesses contain the seeds of their own destruction. Market exuberance leads to business exuberance – production of more goods and services than demand ultimately justifies. Of course, when market and economic excesses are finally corrected, there is a tendency to over-shoot, creating low-risk opportunities for value investors who have remained patient and disciplined.

Yet another long-term risk confronts investors: the government's fiscal and monetary experiments may go awry, resulting in runaway inflation or currency collapse. Bottom-up value investors would not wish to bet the ranch on a macroeconomic view, but neither would they be wise to ignore the macroeconomy altogether. Disaster hedging – always an important tool for investors – takes on heightened significance in today's unprecedentedly challenging environment. Yet, as this insight is not unique to us, the cost of insurance is high. There are no easy ways to navigate these turbulent waters. But because the greatest risks are of currency debasement and runaway inflation, protection against a currency collapse – such as exposure to gold – and against much higher interest rates seem like necessary hedges to maintain."

For more from this value investing guru, see Klarman's lessons from the financial crisis as well as some of his recent activity in commercial real estate.

To read additional insight from top hedge fund managers/investors, we've posted up a ton of great investor letters including:

- John Paulson
- Lee Ainslie's Maverick Capital
- Third Point's Dan Loeb
- Perry Capital
- Barry Rosenstein's JANA Partners
- Warren Buffett's annual letter

What We're Reading ~ 3/4/11

Latest letter from Paul Tudor Jones [Dealbreaker]

Transcript of David Einhorn's FCIC interview [Santangel's Review]

The StockTwits blog network is up and running [StockTwits]

On the critical task of risk management [GregSpeicher]

Rumor: Hedgie makes big Ocado loss? [CityAM]

Falcone allows direct investment in LightSquared [Reuters]

Taconic Capital takes $250m stake in BSkyB [Reuters]

Court rejects hedge fund's challenge to 13F disclosure [FoleyHoag]

iPad2 vs Xoom vs HP TouchPad vs BlackBerry PlayBook: A comparison [Engadget]

ValueAct Capital Sells Gartner (IT) & KAR Auction Services (KAR) Shares

Jeffrey Ubben's activist hedge fund ValueAct Capital recently sold shares in two positions: Gartner (IT) and KAR Auction Services (KAR). ValueAct manages $5 billion and has earned a net annualized return of 13.5% over the last ten years.


Gartner (IT)

First, ValueAct sold 9,700,000 shares of Gartner (IT) at $34.44 per share. After this transaction, they still own 7,090,513 shares. This marks almost a 58% reduction in their position size (shares currently trade around $37.36).

At the end of 2010, IT was their third largest position behind only Valeant Pharmaceuticals (VRX) and Sara Lee (SLE). But now with the sale, the position sits in the middle of their portfolio. This is the second time in six months they've sold shares of IT as they previously reduced their position in September.

KAR Auction Services (KAR)

Second, Ubben's hedge fund sold 1,350,000 shares of KAR Auction Services (KAR) with the bulk of the sale coming at $14.21 per share. After their sales, ValueAct was left with 908,828 shares. All told, it looks like they sold almost 60% of their position. The stock currently trades around $14.25.

ValueAct typically focuses on undervalued companies in the healthcare, technology, and information services sectors.

Companies' Background

Per Google Finance, Gartner is "an information technology (IT) research and advisory company. The Company is a partner to 60,000 clients in 10,000 distinct organizations in over 80 countries. The Company’s principal products and services are delivered through its Research, Consulting and Events segments."

KAR Auction Services is "a holding company. The Company is a provider of vehicle auction services in North America. It facilitates auction services for sellers of used, or whole car, vehicles and salvage vehicles, through its 214 physical auction locations and Internet venues."

Mark Rachesky's MHR Fund Management Goes Activist on Seahawk Drilling (HAWK)

Mark Rachesky's MHR Fund Management has filed an activist 13D with the SEC regarding shares of Seahawk Drilling (HAWKQ). The filing, reflecting portfolio activity on February 16th, indicates MHR has disclosed a 9.8% ownership stake in HAWKQ with 1,173,513 shares. This is not a new position as MHR held the same amount of shares at 2010 year-end.

HAWKQ Selling Assets to Hercules Offshore (HERO)

Rachesky's firm seems to take issue with the debtors of HAWKQ who have fast-tracked a proposed sale transaction with Hercules Offshore (HERO). The proposed sale would result in the debtors receiving $25 million in cash and 22.3 million shares of Hercules common stock in exchange for the sale of substantially all of its assets.

Going Activist: Formation of Equity Committee

MHR has filed in conjunction with Andalusian Capital Partners, FISBC Global Asset Management, and Mercer Park. We'd also point out that Kyle Bass' Hayman Capital disclosed a 8.4% stake in HAWK in a separate and unrelated filing.

Per various exhibits filed with MHR's 13D, we see that they've been granted appointment of an equity committee to secure independent representation for public shareholders "at this crucial stage of these Chapter 11 proceedings, while the Debtors are attempting to fast-track a DIP motion and prearranged sale that equity has not had adequate time to review."

Fund Manager Background

So, we'll have to see what Rachesky has up his sleeve in this regard since his committee formation was granted. Rachesky, prior to founding MHR was a senior investment officer and managing director for Carl Icahn. Needless to say, he's got plenty of experience in the activist realm.

Rachesky earned his B.S. in molecular aspects of cancer from the University of Pennsylvania and an M.D. from Stanford University School of Medicine. Additionally, he earned an MBA from the Stanford Graduate School of Business; the man is a degree-earning machine.

Per Google Finance, Seahawk Drilling was spun-off from Pride International and "operates a jackup rig business that provides contract drilling services to the oil and natural gas exploration and production industry in the Gulf of Mexico."

Be sure to stay up to date with the latest hedge fund filings with our free daily site updates via email or also via RSS reader.

Soros Fund Management Starts Adira Energy (ADENF) Position

George Soros' firm, Soros Fund Management, has filed a 13G with the SEC regarding shares of Adira Energy (ADENF). Per portfolio activity on February 16th, Soros has disclosed a 10.42% ownership stake in ADENF with 10,483,871 shares.

This is a brand new position for the hedge fund and is a result of a non-brokered private placement. Soros acquired shares at $0.62 per share in its Quantum Partners LP investment vehicle. Shares now trade at $0.88. The company also recently announced management changes, inserting Yael Reznik Cramer as interim CEO.

We've detailed other recent portfolio activity from Soros including an addition to their Harvest Natural Resources (HNR) stake, as well as starting a stake in San Leon Energy. For a complete look at Soros' portfolio, head to the newly released issue of Hedge Fund Wisdom.

Per Google Finance, Adira Energy "formerly AMG Oil Ltd., is an early-stage oil and gas exploration company. The wholly owned subsidiaries of the Company include Adira Energy Holdings Corp., Adira Israel Ltd and Adira Energy Services Ltd."

Baupost Group Provides $300 Million in Commercial Real Estate Project

According to the Atlanta Business Chronicle, Seth Klarman's Baupost Group will provide $300 million in equity to restart the "Streets of Buckhead" commercial real estate project in Atlanta, Georgia. Oliver McMillian Inc has purchased the luxury project and plans to start building this year.

We're highlighting this news because it ties directly into what Klarman said last year: he's finding opportunity in commercial real estate. The caveat with that statement, of course, is that he's been focused on private real estate.

In a time when Baupost sees less opportunity in the markets and has even returned some investor capital, this is an example of where Klarman is putting money to work. It's not very often you hear updates on what Baupost is doing, so we wanted to highlight it for those interested. For more from this great investor, check out Seth Klarman's recommended reading list.

Dan Loeb's Third Point Buys El Paso (EP)

Dan Loeb's Third Point Offshore Fund is out with its monthly update on positioning and exposures. The key takeaway here is that Third Point has initiated a position in gas producer El Paso (EP) since the fourth quarter.

The second most notable takeaway is that Potash (POT) is no longer among their top holdings. The stock sold-off hard recently, so that could be the culprit. Or, perhaps they sold shares, other holdings appreciated in value, or they ramped up their stakes in other names; it's tough to discern.

Third Point's Top Positions

1. Gold
2. Delphi (both equity & debt)
3. Chrysler (multiple securities owned)
4. El Paso (EP)
5. LyondellBasell (LYB)


Some of the fund's top winners were gold, NXP Semiconductors (NXPI), El Paso (EP), Technicolor (multiple securities owned), and Williams Companies (WMB). Per their latest disclosure, Third Point also now owns multiple securities in NXPI after previously owning just the equity.

El Paso is the second gas related entity they've invested in recently. Third Point bought WMB in the fourth quarter, as did many other hedge funds. You can read about the investment thesis on WMB in the equity analysis section of our new issue of Hedge Fund Wisdom.

The top losers last month in Third Point's portfolio included Wells Fargo (WFC), BioFuel Energy (BIOF), CIT Group (CIT), Accuride (ACW), and Rentokil Initial PLC (RTO in London, RTOKY on the pink sheets). Wells Fargo also appears to be a new equity position for the hedge fund, unless it is a debt stake that has previously been undisclosed; the disclosure is unclear.

Overall, Loeb favors post-reorganization equities. In particular, he's been active in Smurfit-Stone Container (SSCC), opposing the takeover. LyondellBasell (LYB), another post-reorg equity, continues to be one of Loeb's largest positions.

For the month of February, Third Point was up 3.6% and is up 7.6% for 2011 thus far. Its Offshore Fund has now seen an impressive 19% annualized return since inception in December 1996.


Exposure Levels

Regarding their latest exposure levels, Third Point is 56.2% net long equities with its largest net long exposure in basic materials at 12.1% and consumer at 11.5%. Over the past month or so, Third Point has reduced net long equity exposure by almost 5%.

In credit, the hedge fund is 11.5% net long distressed, 16.5% net long asset backed securities (ABS) which include residential mortgage backed securities (RMBS) and commercial mortgage backed securities (CMBS). They are also net short -5.4% government securities, cutting their short exposure to this asset class almost in half.

For a full assessment of Loeb's portfolio and the investment thesis behind some of his picks, head to the brand new issue of Hedge Fund Wisdom that was just released.

Dan Arbess' Xerion Fund Likes Chemical Stocks

Per Bloomberg's Hedge Fund Brief, Dan Arbess' Xerion Fund (part of Perella Weinberg Partners) is betting on chemical stocks. In particular, he likes those companies that utilize lower-cost natural gas in production, such as LyondellBasell (LYB).

Chemical maker LYB emerged from bankruptcy last year and has been a big favorite amongst investment managers. In fact, LyondellBasell was a consensus buy in the fourth quarter amongst hedge funds we track in our Hedge Fund Wisdom newsletter. In addition to Xerion, Dan Loeb's Third Point LLC holds a large stake in LYB as it is their fifth largest position.

Arbess said that, "There are a lot of companies that can just take higher feedstock costs and pass them right on to their customers. They are being sold off very aggressively right now and can be picked up. We liked them 10-15% higher before the sell-off; we love them down here." In addition to LYB, Arbess fancies Solutia (SOA) and Rockwood Holdings (ROC).

Arbess also reiterated his positions in exploration and production oil companies in Brazil and West Africa. We've posted about these investments in a previous investor letter that detailed Xerion's 2011 investment strategy & outlook.

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