Thomas Steyer's Farallon Capital Fancies Capitalsource (CSE): 13F Filing ~ market folly

Thursday, September 3, 2009

Thomas Steyer's Farallon Capital Fancies Capitalsource (CSE): 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.

Today we're covering Thomas Steyer's hedge fund Farallon Capital Management. Founded by Steyer in 1986, Farallon employs risk arbitrage strategies. Previously, he was an analyst for Morgan Stanley in their Mergers & Acquisitions department and also an associate on Goldman Sachs' risk arbitrage desk. Farallon typically invests in equities, debt (public & private), private investments, and real estate. Steyer graduated Summa Cum Laude from Yale University and went on to receive his MBA from Stanford.

Despite their typically solid record, 2008 was a rough year for Farallon as they suspended withdrawals after receiving requests for up to 25% of their main fund's capital. In order to keep hold of investors, they offered no typical management and performance fees but instead shifted to accounting fees. The activity of 2008 landed them in the pool of top 10 asset losers. Nevertheless, they were still ranked third in Alpha's 2008 hedge fund rankings. In terms of recent activity, we posted up when Farallon filed a 13D on Global Gold (GBGD).

The following were Farallon'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):
MSCI (MXB), Apollo Group (APOL), iShares Russell 2000 (IWM) Puts, Oracle (ORCL), Select Sector Financials (XLF) Puts, Qualcomm (QCOM), Moodys (MCO), Metavante Tech (MV), Lucent Technologies DBCV 2.75% 6/1, Arch Capital Group (ACGL), Carrizo Oil & Gas Bond, Sirius Satellite Note 3.250% 10/1, Kendle International Bond, Amdocs (DOX), Con-way (CNW), Solutia (SOA), Interval Leisure (IILG), and CTC Media (CTCM).

Some Increased Positions (A few positions they already owned but added shares to)
Discovery Communications (DISCA): Increased by 82.7%
Freightcar America (RAIL): Increased by 59.1%
America Movil (AMX): Increased by 36.3%
Priceline (PCLN): Increased by 22.2%

Some Reduced Positions (Some positions they sold some shares of)
Pinnacle Entertainment (PNK): Reduced by 98.1% (was previously only a tiny position for them anyways)
Sherwin Williams (SHW): Reduced by 79.4%
Fidelity National (FIS): Reduced by 54%
Mastercard (MA): Reduced by 39.4%
Burlington Northern (BNI): Reduced by 36.9%
Visa (V): Reduced by 28.1%
Capitalsource (CSE): Reduced by 8.2%

Removed Positions (Positions they sold out of completely)
Cablevision (CVC)
The rest of their removed positions were less than 0.25% of their reported holdings each:
Affordable Residential Cmnty Note 7.5% 8/1
D&E Communications (DECC)
Magna Entertainment (MECA)

Top 15 Holdings by percentage of long portfolio as reported on the 13F Filing *(see note below regarding calculations)

  1. Capitalsource (CSE): 13.98%
  2. Burlington Northern (BNI): 5.22%
  3. America Movil (AMX): 5.11%
  4. Visa (V): 4.87%
  5. Lucent Technologies 2.750% bond: 4.8%
  6. MSCI (MXB): 4.22
  7. Discovery Communications (DISCA): 3.89%
  8. Knology (KNOL): 3.84%
  9. Apollo Group (APOL): 3.78%
  10. iShares Russell 2000 (IWM) Puts: 3.77%
  11. Oracle (ORCL): 3.65%
  12. Select Sector Financials (XLF) Puts: 3.57%
  13. Qualcomm (QCOM): 3.48%
  14. Priceline (PCLN): 2.73%
  15. Moodys (MCO): 2.66%

Interestingly enough, Farallon shares their top position with that of Seth Klarman's Baupost Group. Both hedge funds have Capitalsource (CSE) reported as their top holding via the 13F filing which is intriguing. Clearly these two saw value in the company when shares were down big and they both continue to hold this name.

It is also interesting to see Farallon start a brand new position in Moodys (MCO) given that Warren Buffett has sold some shares of his position and David Einhorn (Greenlight Capital) has been short MCO (unknown whether he is still short though) citing a balance sheet with negative shareholder equity and declining relevance in an environment where regulation is anticipated to rise. This just goes to show that there is always two sides to the story and even prominent investors disagree on various positions.

America Movil (AMX) is another position worth pointing out as it sits in third position in Farallon's portfolio. Numerous 'Tiger Cub' hedge funds have had a stake in this name previously. However, many of them sold out of the position, except for Stephen Mandel's Lone Pine Capital who still holds a big stake. Farallon also holds Tiger Cub fund favorites Visa (V) and Mastercard (MA). However, Farallon was out selling part of their position over the past quarter.

Other notable sales include them completely selling out of Cablevision (CVC) which was previously almost 4.5% of their reportable assets on the 13F last time around. They sold off a third of their #2 reported holding, Burlington Northern (BNI) which was interesting. This of course is a long-time Warren Buffett favorite play. They also sold a decent chunk of their Sherwin Williams (SHW) position. In terms of additions, Farallon came close to doubling down on their Discovery Communications (DISCA) stake which we took note of because this stock is widely held by many hedge funds.

*Note regarding portfolio percentages: Assets from the collective holdings reported to the SEC via 13F filing were $1 billion this quarter compared to $494 million last quarter, so they more than doubled their assets invested in long US equities, notes, and options. 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), Lee Ainslie's Maverick Capital, Philip Falcone's Harbinger Capital Partners, David Stemerman's Conatus Capital, Eric Mindich's Eton Park Capital, and John Griffin's Blue Ridge Capital. Check back each day as we cover prominent hedge fund portfolios.

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