Philip Falcone's Harbinger Capital Partners Adds Natural Resource Plays: 13F Filing ~ market folly

Thursday, August 27, 2009

Philip Falcone's Harbinger Capital Partners Adds Natural Resource Plays: 13F Filing

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

Next up is Philip Falcone's Harbinger Capital Partners. They are a $6 billion hedge fund that started back in 2000 with $25 million in seed capital from Harbert Management. Recently, Falcone bought out Harbert to gain ownership of Harbinger. And, he is 'commemorating' his purchase by returning to his roots and launching a new Harbinger hedge fund focused on distressed assets. Harbinger returned 117% in 2007 when Falcone notoriously shorted subprime mortgages. His investment style focuses on intensive research on credit, bankruptcies and proxy fights. While he obviously holds equity positions, Falcone definitely is well versed in different asset classes.

However, despite Falcone's investing acumen, Harbinger Capital Partners lost over 60% of their assets on a year over year basis as their portfolio was down 22.7% for 2008. Poor performance and redemptions landed Harbinger in the number one slot on the list of top 10 asset losers. While the 13F details their most recently portfolio changes, we've already covered a lot of the movements right when they happened since we also track 13D and 13G filings. This is the benefit of focusing on the full gamut of SEC filings rather than just the 13F. As we've been covering on the blog, Harbinger has been decreasing their Cliffs Natural Resources (CLF) position, selling off some of their Calpine (CPN), and most recently amended their 13D on SkyTerra. Lastly, they've also been selling shares of Solutia (SOA) as if it were going out of style. We haven't covered their performance in a while but as of the end of March they were up 4.06%.

The following were Harbinger's long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some New Positions (Brand new positions that they initiated in the last quarter):
Freeport McMoran (FCX)
Teck Resources (TCK)
Ultrashort Financials (SKF)
Zapata (ZAP) - we had already covered their new ZAP position via their 13D filing
Legg Mason (LM)

Some Increased Positions (A few positions they already owned but added shares to)
Terrestar (TSTR): Increased by 22.9%

Some Reduced Positions (Some positions they sold some shares of)
Cliffs Resources (CLF): Reduced by 94%
Atlas Air Worldwide (AAWW): Reduced by 60.7%
Solutia (SOA): Reduced by 55.5% (and they continue to sell this position as we've documented in our coverage of their 13D filing)
Calpine (CPN): Reduced by 28.3%

Removed Positions (Positions they sold out of completely)
Consol Energy (CNX)
Hughes Communications (HUGH)
The rest of the positions they sold out of were less than 0.15% of their portfolio each:
MDC Partners (MDCA)
Weatherford International (WFT)
Direxion 3x Bear Financials (FAZ)
ICO Global (ICOG)

Top 15 Holdings by percentage of long portfolio *(see note below regarding calculations)

  1. Calpine (CPN): 37.7% of portfolio
  2. Leap Wireless (LEAP): 14.85% of portfolio
  3. McDermott (MDR): 10.36% of portfolio
  4. NY Times (NYT): 10.10% of portfolio
  5. Atlas Air Worldwide (AAWW): 4.27% of portfolio
  6. Solutia (SOA): 3.52% of portfolio
  7. Terrestar (TSTR): 3.25% of portfolio
  8. Freeport McMoran (FCX): 3.22% of portfolio
  9. Constellation Energy (CEG): 2.89% of portfolio
  10. Teck Resources (TCK): 1.77% of portfolio
  11. Ultrashort Financial (SKF): 1.68% of portfolio
  12. Zapata (ZAP): 1.45% of portfolio
  13. Medivation (MDVN): 1.15% of portfolio
  14. Legg Mason (LM): 0.81% of portfolio
  15. Cliffs Resources (CLF): 0.71% of portfolio

Harbinger typically runs a pretty concentrated equity portfolio and this quarter is no different. They focus in on their best ideas and try to institute change and drum up shareholder value through various methods.

In terms of brand new positions, we can't help but notice their fondness for natural resources and mining plays Freeport McMoran (FCX) and Teck Resources (TCK). Both have rallied substantially from their lows and Harbinger started new stakes in each. FCX is Harbinger's 8th largest long equity position while TCK is their 10th. In the past, Harbinger had a huge stake in another miner, Cliffs Resources (CLF). While they still hold their position today, it is not nearly as large as it once was considering they just sold 94% of their position. We'll be interested to see if they ratchet their new positions up further in the future as they could possibly see these companies as takeover targets in an industry that seems to always be filled with merger rumors. But after the sour taste left in their mouth from the CLF merger debacle, Harbinger will be cautious not to let that happen again.

Also possibly worth highlighting is the fact that they added the Ultrashort Financials exchange traded fund SKF. This is the second prominent hedge fund we've seen do so in the latest round of 13F filings. (John Paulson bought a ton of financials and then hedged it with SKF). We will be quick to point out that these leveraged inverse ETFs suffer tracking problems the longer you hold them. They replicate the daily performance of their underlying index and as such suffer compounding complications over time. They do what they are designed to do well (track daily performance), but they are best used for quick trades. They can absolutely fly if things start to heat up in the markets. For instance, last October and November in the markets when the financials were tanking, SKF was up 10-15% on what seemed like a daily basis, which is an easy profit. That potential profit though, comes with lots of inherent risk so make sure you're aware of how the instrument operates. We're highlighting Harbinger's entrance into this play as it gives us a look at their potential directional bets. They could have established this for a few reasons: they think financials have rallied too hard recently, they are more bearish on a macro level, or they simply want a hedge for downside protection should things get ugly again. Hell, it could have just been a trade that happened to show up during the 13F reporting period... who knows. Nonetheless, it's interesting to see. Their SKF position is 1.68% of their long US equity portfolio.

While we've outlined all of Harbinger's long equity positions above, keep in mind that they were as of June 30th, 2009. Please note that since that date, they have filed various 13D, 13G, and Form 4's with the SEC as it seems they are constantly shuffling their portfolio. Those newer filings update their portfolio with more recent information and we just wanted to insert that cautionary note for those really tracking these funds in-depth. We typically try and cover all their filings on the blog but would still recommend checking out the latest movements from Harbinger as filed with the SEC here.

*Note regarding portfolio percentages: Assets from the collective holdings reported to the SEC via 13F filing were $1.5 billion this quarter compared to $1.4 billion last quarter. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. In reality, the percentages are more watered down in their actual hedge fund portfolio. If you were to calculate percentage weightings in the actual hedge fund portfolio, they would obviously be different since you would divide position sizes by their total assets under management.

This is just one of the 40+ prominent funds that we'll be covering in our Q2 2009 hedge fund portfolio series. So far, we've already covered the holdings of Bill Ackman's Pershing Square Capital Management, David Einhorn's Greenlight Capital, Seth Klarman's Baupost Group, Dan Loeb's Third Point LLC, and Stephen Mandel's Lone Pine Capital, George Soros (Soros Fund Management), and Lee Ainslie's Maverick Capital. Check back each day as we cover prominent hedge fund portfolios.

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