Hedge Fund News Summary (Soros, Och Ziff, Taleb, & More) ~ market folly

Thursday, June 18, 2009

Hedge Fund News Summary (Soros, Och Ziff, Taleb, & More)

We've found a bunch of various hedge fund tidbits that aren't long enough to merit their own article, so we decided to collectively assemble them into this melting pot of a post. Without further ado, we present some of the news that has surfaced out of hedge fund land over the recent days:

- George Soros has called credit default swaps "instruments of destruction" and thinks they should be banned. Shorting via credit default swaps allows limited risk and unlimited profit potential in a sense. Soros argues that those selling CDS receive limited profit potential and unlimited risk, yielding a clear imbalance. Soros said, "People buy a CDS not because they expect an eventual default but because they expect them to appreciate in response to the adverse developments." He cites AIG as a major loser in this regard as they were a large seller of CDS and were on the receiving end of the negative reward spectrum. Lastly, in a separate conversation, Soros has said that the market, "may have further to go because there is a lot of liquidity, a lot of investors are on the sidelines. If the market keeps on going up, more of them may decide to join in. You never know how far the rally goes." His old colleague at the Quantum Fund, Jim Rogers, agrees with him, as we noted when we recently covered Rogers' portfolio & thoughts. Speaking on the topic of China, Soros also thinks that they have benefited from being isolated from the world and they are in better shape than the international banking system. He thinks that China's influence will grow faster than most people think. We just yesterday covered Soros' hedge fund portfolio.

- Hedge Fund Och Ziff had almost 35% of their assets in cash as of the first quarter as they expect markets to fall again. Currently, they manage around $20 billion in hedge fund assets, so you do the math. They believe the economic recovery will be a long drawn out process and it will not just bounce back immediately. Their main fund lose 15.5% last year and is up 6.3% for 2009 as of the end of April.

- David Einhorn's Greenlight Capital noted in his May investor letter that he has returned to financial and REIT shorts after those sectors have rallied heartily. We also learned that he has put on an options bet wagering that interest rates will rise. (We also recently covered a somewhat similar play: Julian Robertson's steepener play). Additionally, Einhorn still retains a large gold position, which we noted when we covered Greenlight's portfolio.

- Nassim Taleb associated Universa Investments is starting a fund based on the thesis of hyperinflation. Universa has ties to Nassim Taleb, the author of the (in)famous book, The Black Swan, which talks about how extreme events can impact the markets. And, it is also a part of our recommended reading list series. Universa was up more than 100% in 2008 due to their bearish stance. They started with $300 million in 2007 and now run around $6 billion. The new fund will be run by Mark Spitznagel and wagers on rising interest rates, among other inflation based plays (such as commodities and options). While Taleb himself does not run the firm, he has significant investments with them and is often associated with them. In the past, we've covered Taleb's explanation of the Black Swan.

- Boaz Weinstein will be starting a new hedge fund, Saba Capital Management. They plan to start trading in August and have raised around $160 million since the end of April. Weinstein has made headlines for the fact that he lost more than $1 billion last year at Deutsche Bank trading bonds. The fund is named Saba after the Hebrew word for grandfather. It is also the name of the credit unit Weinstein started while at DB. His bad performance last year is his only losing year out of 11 years. He felt pain from misteps in Ford (F) bonds and various credit default swaps. His DB unit last year was down around 18% and managed around $10 billion. We'll have to see if he can get back to his past winning ways with his new venture.

- Hedge Fund Balyasny Asset Management was using leverage of 20 cents for every dollar they had in net assets for their stock funds. Their long/short split is roughly 50/50 these days as well. Dmitry Balyasny said, "Economic numbers, housing data, earnings, risk appetite and credit have all gotten less bad. The question is, for how long?" Their main fund was up 0.5% for 2008 and is up 2% thus far in 2009. They are leaning towards the belief that stocks will drop in the second half of the year. Balyasny goes on to say, "The situation is quite fluid and we have to respect the probability that the market is going to continue discounting bad news and embracing every slight improvement, causing shorts to eventually capitulate." We will be covering Balyasny in our hedge fund portfolio tracking series here soon, so stay tuned.

- A pair of ex-Touradji Capital portfolio managers have launched a new commodities fund. Instead of playing directly in commodities market as Touradji typically does, their new venture will make relative value based bets via the equity markets. This new fund sounds like an excellent candidate for our hedge fund series as it will allow us to track commodity and macro experts via equities positions, which are very easy to track courtesy of SEC filings. We haven't covered Touradji yet in our Q1 2009 portfolio tracking series, but we'll be getting to them very soon, so stay tuned.

And with that, we conclude our quick wrap up of some various hedge fund news tidbits.

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