Friday, May 15, 2009

Blue Ridge Capital's Recommended Economics Reading List

Time for the third installment in our series of 4 articles revealing Blue Ridge Capital's recommended reading list. Previously, we've revealed Blue Ridge's recommended Analytical Reading List, as well as their Historical/Biographical List. This week, we'll turn to their recommended Economics books.

Long-time blog readers will know that we track Blue Ridge because they are the pure definition of a Tiger Cub. Founder John Griffin was Julian Robertson's right-hand man while at Tiger Management and was one of the first to strike out on his own.


Capitalism and Freedom by Milton Friedman: A must-read by one of the most well-known economists out there.

The Lexus and the Olive Tree by Thomas Friedman: A book that deals with understanding globalization and argues that globalization (the Lexus) is "the central organizing principal of the post-cold war world."

Economics in One Lesson by Henry Hazlitt: With an introduction by Steve Forbes, this book is a great primer on economic thinking.

Eat the Rich by PJ O'Rourke: A tour of two years worth of economic practice, focusing on good capitalism and bad capitalism, among other things.


How To Win Friends and Influence People by Dale Carnegie: The "grandfather of all people-skills books." It details fundamental techniques and principles for dealing and interacting with people.

Atlas Shrugged by Ayn Rand: Not only recommended by Blue Ridge, but by many other hedge fund managers out there, this book deals with philosophy of objectivism.

The Tao Jones Averages by Bennett Goodspeed: Touches on the mindset required to succeed as an investor.

The Tao of Pooh by Benjamin Hoff: Despite the somewhat silly title, this book examines what a Western Taoist is.

The Te of Piglet by Benjamin Hoff: Similar to the above, this book examines the Taoist embodiment of Te, or virtue.

Nonzero: The Logic of Human Destiny by Robert Wright: Address the convtroversial question of 'purpose in evolution.'

That completes their Economics and 'Other' recommendations from hedge fund Blue Ridge Capital.  Check out the rest of their recommendations in the categories below:

- Blue Ridge's Recommended Analytical Reading

- Blue Ridge's Recommended Historical/Biographical Reading

- Blue Ridge's favorite behavioral finance books

Background on Blue Ridge:

Griffin is a Tiger Cub, and as mentioned above, he was Julian Robertson's right hand man. So, needless to say, he knows his stuff. Blue Ridge seeks absolute returns by investing in companies who dominate their industries and shorting the companies who have fundamental problems.

Both Griffin at Blue Ridge and Lee Ainslie over at Maverick Capital like to effectively hedge with a solid balance of both long and short positions (like a true hedge fund... not like some of the crazy funds these days that aren't truly hedged). Griffin attended the University of Virginia for undergrad and received his MBA from Stanford.

Hayman Capital's Kyle Bass Predicts Sovereign Defaults

Hedge fund Hayman Advisors has a morbid outlook on the economy. Kyle Bass, the manager of Hayman, is betting on a massive wave of state bankruptcies and restructurings, particularly in Europe. At first glance this may seem far-fetched. But, you have to consider Bass and Hayman's track record thus far. Their fund was up 340% since inception according to their investor letter in March of this year. They were also up 6% in 2008, a year that saw the S&P drop by massive double figures. Bass collected nearly half a billion dollars from his bets against subprime. Much like John Paulson of hedge fund Paulson & Co, Bass also predicted the crisis. His next prediction is even more extreme.

Bass has gone as far to say that he thinks there will be massive sovereign defaults. We initially cited his dreary outlook in our piece, 'Ranting, Raving, & Contrarian Signals' back on March 8th, 2009. And, we did so because such extreme pessimism is usually a sign of short-term tops or bottoms. And, right on cue, the market is up over 30% since we highlighted that short-term contrarian signal. Contrarianism aside, Bass does command respect. After all, he profited handsomely by predicting the crisis and the collapse of subprime. While such extreme pessimism may be a catalyst for a short-term rally, we should be quite concerned if Bass' next set of predictions come true, as they would undoubtedly affect the long-term.

Bass has specifically turned his focus to Europe, where he sees a large cloud of denial and leverage. While he sees problems throughout the world, he claims that Europe is in the eye of the storm. A quick example of this is the fact that American banks have written down around 50% of their losses. European banks, on the other hand, have only written down around 17%. Bass says that,

"The crux of the problem is not sub-prime, or Alt-A mortgage loans, or this or that bank. Governments around the world allowed their banking systems to grow unchecked, in some cases growing into an untenable liability for the host country ... We have spent a good part of six months combing through the world's sovereign balance sheets to understand how much leverage we are dealing with. The results are shocking ... There could be a cluster of defaults over the next three years, possibly sooner."

Bass' hedge fund thinks that the hazard of default stems from a combination of both out-of-control public debt and liabilities from specific banks (like Fortis, RBS, etc) that now prominently appear on sovereign balance sheets. He seems to flirt dangerously with the phrase, 'economic depression.' He is also careful to point out that he is not Dr. Doom. He has simply studied the housing market and sovereign balance sheets to the point where he is telling it like he sees it.

Countries have largely fought off the crisis by printing money and rolling over their debt. And, here in the United States, quantitative easing has already begun. As Ambrose Evans-Pritchard points out in his Telegraph piece, "spasms of default" occur every few generations according to research by former IMF chief economist Ken Rogoff. Such data highlights that in both the 1830's and the 1930's, half of the world was essentially torpedoed. Are we in for another generational fragmentation? Kyle Bass is clearly not ruling out that possibility.

Background on Kyle Bass & Hayman Advisors: Kyle attended Texas Christian University (TCU) in Fort Worth, TX and now plies his trade at his Dallas based Hayman Advisors. He launched his hedge fund in 2006 with $33 million in initial capital. In August of 2006, he began shorting around $4 billion of subprime securities through various derivatives. Then, he eventually turned over $100 million into over $700 million based on his prediction of the crisis. He previously has worked at Bear Stearns' event-driven and special situations unit as has also headed an office of Legg Mason. His first major prediction (and victory) focused on over-leverage. We'll have to see if his second leverage-based prediction plays out.

If you haven't quite had your daily dose of pessimism yet, then check out Hayman's March letter. It will probably fill you right up.

Satellite Closes Hedge Funds

The painful year of 2008 was too much for Satellite Asset Management as they are set to shut down their flagship Credit Opportunities Fund which was down around 35% during the mayhem of 2008. They will also be closing their Overseas Fund and their Satellite Fund II. Their poor performance triggered a series of investor withdrawal requests and they were forced to suspend redemptions. Apparently they could not stop the hemorrhaging, as redemption requests simply overwhelmed them. Chalk up another victory for Ms. Market, as we add another name to the hedge fund graveyard of 2008.

The interesting thing to note here is that the fund was run by three veterans of Soros Fund Management. This is an example of another fund that was spun-off/started after managers left a big global macro style hedge fund. Just yesterday, we covered how Dwight Anderson blew up his Ospraie fund after leaving Tudor Investment Corp. However, Anderson is right back to the same tricks as he has started two new hedge funds. We'll have to see if the trio of ex-Soros managers will garner new capital to start yet another fund after already failing once. Satellite was run by Mark Sonnino, Lief Rosenblatt, and Gabe Nechamkin and they managed $7 billion around its peak and over $2 billion more recently.

What We're Reading 5/15/09

Top 25 Warren Buffett Quotes [Bankling]

Trouble in Quant-land again [Wall Street Journal]

Hedge funds cutting fees for investors [FT]

What if hedge funds had billboards [HedgeFundBlogMan]

The Credit Card Squeeze [New York Times] - Everyone is using a variation of that title these days.

Thursday, May 14, 2009

Dwight Anderson To Open 2 New Ospraie Hedge Funds

If at first you don't succeed, try, try again. This cliché is the root of folly on Wall Street and in the hedge fund industry in general. Perfect example: The Ospraie Fund's Dwight Anderson is set to start two new hedge funds in July. Okay, new hedge funds, what's the big deal? Well, the problem here is that Dwight Anderson lost 39% in his Ospraie Fund in 2008 and had to liquidate the fund. At its peak, Ospraie managed $3.8 billion in commodities. But if at first you don't succeed, try, try again. And, that's exactly what Anderson is set to do.

Anderson will open two new hedge funds in July of 2009, the first of which will focus on stocks of commodity and basic materials companies (The Ospraie Equity Fund). He will also open a fund focused on commodities and derivatives (The Ospraie Commodity Fund). Anderson said that he is starting these funds because he sees significant opportunities in this market, as significant as he has ever seen in his 15 years of investing. These funds will have reduced fees where investors will pay half as much as the typical hedge fund. His new funds will charge a 1% management fee and a 10% performance fee.

His Ospraie fund is named after the osprey, a marine bird of prey. Ironically enough, his fund was the one being preyed upon in 2008. The volatile year of 2008 goes to show that anyone, regardless of their background can be humbled by Ms. Market. Anderson had previously worked at Julian Robertson's Tiger Management. While we never covered Anderson on the blog, we did cover numerous other successful Tiger Cub hedge fund managers. Anderson then went to work for global macro giant Paul Tudor Jones' Tudor Investment Corp. Contrary to Anderson, Tudor has made it through this crisis largely unscathed. Scoreboard: Master 1, Apprentice 0.

Anderson started Ospraie while at Tudor and then eventually spun it off where he saw 15% annual gains from 2000 until 2007. But, even after working and learning from some of the best in the game, Anderson still got hit... hard. Interestingly enough, we see that another fund has recently spun out of Tudor Investment Corp: James Pallotta's Raptor Capital. We just started covering Raptor in our hedge fund tracking series and only time will tell if they can avoid the fate suffered by Ospraie's prior Tudor spin-off. In an unrelated note: what's up with all the funds coming out of Tudor being named after animals of prey? We found that interesting, as everyone wants to be 'the hunter.' It's just highly ironic when you become the one being hunted.

To conclude, we rejoin our market fairytale. In typical Wall Street fashion, Anderson closed his old fund and brought two new funds to the surface. When will this pitiful cycle end? It amazes us that managers are continually given money after blowing up. But, that's Wall Street and that's the hedge fund industry; folly at its best. If at first you don't succeed, try, try again. Sigh.

Mutual Funds Using Hedge Fund Strategies

Typically, most vanilla mutual funds don't short stocks. They are usually long-only funds aimed at matching or beating certain benchmarks. But, over the past few years, we've seen an evolution in the arena of money management and actively managed portfolios. Case in point: We've just learned that $14 billion Turner Investment Partners is launching the Turner Spectrum Fund which aims to earn similar returns as hedge funds by employing those strategies. The fund will have two share classes: an Institutional class charging a 1.95% fee (minimum investment of $100,000) and a Retail class which will charge a 2.2% fee with a $2500 minimum. However, unlike hedge funds, these mutual funds will not charge a performance fee. (Hedge funds typically charge a flat management fee of around 2% and then a performance based fee of 20% of all profits).

Essentially, Turner is relying on their managers to create six other long-short equity strategies including: market-neutral, a financial sector, a healthcare sector, and other sector strategies. It will be interesting to monitor their progress and their performance. They've launched these funds as a way to capitalize on those investors hesitant to invest in hedge funds themselves given how the Bernie Madoff saga has scarred the industry. Keep in mind that this is not a new development on the scene. Instead, they are merely taking the ball and running with it.

Both Legg Mason and AQR Capital have mutual funds using similar hedge fund-like strategies. Also, there are many individual mutual fund managers that are shorting stocks in their mutual fund portfolios. One of the most well-known would have to be Ken Heebner, of CGM Funds. Heebner runs a very active book, turning over the portfolio numerous time within each year. And, his use of shorting definitely draws him closer to a long/short equity hedge fund strategy. He correctly shorted Washington Mutual among others in the turmoil of 2008. However, his small short portfolio was not enough to stave off massive losses in his longs. After having a rampantly successful year in 2007, Heebner came crashing down in 2008. His CGMFX mutual fund was down over 48%. Even though he was using hedge fund-like strategies, he could not avoid losses either. Interestingly enough, we've also noted that Heebner himself will be starting a hedge fund, Wayfarer Capital.

Another example of possible flaws in these hedge fund vehicles came to light when we highlighted QAI, a hedge fund strategy exchange traded fund (etf). We had numerous criticisms of that vehicle and questioned it's ability to truly replicate hedge fund performance. Instead of operating like an individual hedge fund, it seems to be more like a hedge fund of funds that combines various strategies into one collective portfolio. We'll have to check out the fine details of the Turner Spectrum Fund as well.

As a whole, the rough market of 2008 has definitely highlighted the benefits of being truly hedged to downside risk. As such, there's definitely demand from investors for vehicles that can protect them from losses and generate returns in any market. But, the aforementioned mutual funds and ETFs aren't necessarily "hedged vehicles," but rather vehicles seeking hedge fund returns. And, in 2008, hedge funds as a whole didn't perform that well, as they too suffered losses. Well, that is, except for a select few (as we highlighted in our 2008 full year hedge fund performance numbers).

Another major problem here is that they won't be able to truly replicate hedge fund strategies to their fullest extent. And, they aren't really even trying to replicate the strategies as much as they are trying to replicate just the returns. This is mainly due to the limitations and restrictions of the only vehicles they can really provide to investors: mutual funds and exchange traded funds. Sure, they are shorting like a hedge fund would. But, are they using options, bonds, notes and other means to take advantage of unique situations? Are they trading currencies or commodities? Are they turning activist on management teams to institute change? Are they running quantitative algorithms with proven performance? Surely they cannot be that precise. And, they won't be. Their goal of 'earning returns like hedge funds' is so broad and vague that it's pretty much open for interpretation. In the end, it doesn't seem like it matters how they get to the end result. As long as they 'generate returns like hedge funds,' they'll deem the vehicle a success.

While these hedge fund replication vehicles mean well, they are far from perfect. They may prove us wrong and come directly in line with hedge fund benchmarks and performance metrics. But, only time will tell and that's why we intend to monitor them. As is often the case with Wall Street, investments can be marketed differently than what they truly are. And, right now, it seems like the phrase 'hedge fund-like returns' is all the rage. Obviously a distinction will have to be made between the terminology of 'using hedge fund strategies' versus 'aiming for hedge fund returns.' The catchphrase of 'using hedge fund strategies' would more likely attempt to replicate their actual portfolios. 'Aiming for hedge fund returns,' on the other hand, is vague and implies that they will invest however they please, as long as they match the numbers they are attempting to duplicate. In the end, these vehicles are not nor will they ever be truly like hedge funds. But, given the bad year hedge funds had and the overall crazy environment, maybe that's not such a bad thing.

Jeremy Grantham's First Quarter 2009 Letter

Below you'll find some absolutely required reading. Jeremy Grantham of GMO has published his thoughts for the first quarter of 2009. In the past, we've also posted up Grantham's March thoughts if you're interested. RSS & Email readers need to come to the blog to view the slide-deck.

Wednesday, May 13, 2009

Blue Ridge Capital's Recommended Reading List: Historical & Biographical Edition

This is the second post in our series of four articles divulging recommended reading from John Griffin's hedge fund Blue Ridge Capital.  Last week, we looked at Blue Ridge's recommended Analytical Reading List, which was full of many great books. This week, we'll turn to their Historical & Biographical list.


The Money Masters ( as well as The New Money Masters) both by John Train: Covers experts on various schools of investing thought: growth, value, emerging markets, turnarounds, top-down, bottom-up, and more.

No Bull by Michael Steinhardt: Autobiography by one of the first true hedge fund managers out there. His firm survived the collapse of the 1960's.

Soros on Soros: Staying Ahead of the Curve by George Soros: An interview with Soros (an entire book's worth) regarding his investment philosophies and more.

Wall Street: A History by Charles Giesst

Where Are the Customers' Yachts? by Fred Schwed: Humorous and entertaining book about the hypocrisy and folly of Wall Street (sounds like our kind of book!)

The New Market Wizards & Interviews With Top Traders both by Jack Schwager (and staples on our reading list): Inside look at some of the best traders in the game, including many fund managers who we cover on the blog

Reminiscences of a Stock Operator by Edwin Lefevre (also on our previous lists): Takes you inside the mind of a trading and provides tons of trading wisdom and insight.

Classic II: Another Investor's Anthology by Ellis & Vertin:

The Great Game by John S. Gordon: History of how New York became the world's "preeminent financial power."

Famous First Bubbles by Peter Garber: Explanations of the three most famous bubbles in history: Dutch Tulips, Mississippi Buble, and the South Sea Bubble.

Chainsaw: The Notorious Career of Al Dunlap by John Byrne: Documentation of the rise and fall of a man known for downsizing corporations for short-term shareholder gain.

The Essays of Warren Buffett by the Oracle himself: Lessons from Warren Buffett over the years.

Go-Go Years: Drama and Crashing Finale of Wall Street's Bullish 60s by John Brooks: A look at the rise of growth stocks in the 1960's that led to the ultimate fall in the 1970's.

Baruch: My Own Story by Bernard Baruch

There you have it, Blue Ridge's recommended historical and biographical works. Be sure to also check out the hedge fund's favorite picks in the following categories below:

- Blue Ridge Capital's recommended Analytical Reading

- Blue Ridge's favorite Behavioral Finance books

- Blue Ridge's recommended Economics reading

Background on Blue Ridge:

Griffin is a Tiger Cub, and as mentioned above, he was Julian Robertson's right hand man. So, needless to say, he knows his stuff. Blue Ridge seeks absolute returns by investing in companies who dominate their industries and shorting the companies who have fundamental problems.

Both Griffin at Blue Ridge and Lee Ainslie over at Maverick Capital like to effectively hedge with a solid balance of both long and short positions (like a true hedge fund... not like some of the crazy funds these days that aren't truly hedged). Griffin attended the University of Virginia for undergrad and received his MBA from Stanford.

Bill Ackman's Pershing Square Sells Entire Wendy's Arby's Group (WEN) Position

In an amended 13G filed with the SEC due to activity on April 30th, 2009, Pershing Square Capital has updated their stake in Wendy's Arby's Group (WEN). Bill Ackman's hedge fund now shows a 0% ownership stake in Wendy's and owns 0 shares. They have completely sold out of their position. In their previous 13F filing, which disclosed their positions from December 2008, Pershing owned over 45 million shares. Now, they own none.

Bill Ackman has been quite busy lately, as we just yesterday covered his thoughts on his positions in General Growth and Target. Pershing runs a concentrated portfolio of around 8-10 long positions. Ackman's main focus is currently on his largest position, Target (TGT), where he is leading an activist campaign to illicit change in the company's board. He is also dealing with the bankruptcy of General Growth Properties, whom he thinks will emerge out of Chapter 11 with shareholders intact. Wendy's Arby's Group was one of his smaller positions and he seems to be moving on to his other projects now. You can view the rest of Pershing Square's portfolio, but be aware that they are due to update their filings at the end of the week. We will be covering their new portfolio changes in our hedge fund tracking series, so be on the look out.

If you haven't had enough of Bill Ackman yet, you can get more thoughts from him in his interview with Charlie Rose and his letter to Target shareholders. Pershing Square employs value and activist strategies to run their portfolios.

Taken from Google Finance,

Wendy's Arby's Group is "the parent company of Wendy’s International, Inc. (Wendy’s) and Arby’s Restaurant Group, Inc. (ARG), which are the franchisors of the Wendy’s and Arby’s restaurant systems. As of December 28, 2008, the Wendy’s restaurant system consisted of 6,630 restaurants, of which 1,406 were owned and operated by the Company. As of December 28, 2008, the Arby’s restaurant system included 3,756 restaurants, of which 1,176 were owned and operated by the Company."

Hedge Fund April 2009 Performance Numbers

Time to get a quick update on how hedge funds performed in April of 2009. After starting off 2009 on the right foot, a few funds were caught off guard with the sharp rally, as it is has started to affect performance. We previously got a peek at their mid-April performance and now we're here with the month end results.

International Financial Services London thinks hedge fund assets could drop more than 20% in 2009. And, this would be in addition to the 30% drop we saw last year. Obviously, only time will tell. But, we'd wager that it would take another major market shift to really cause a second major wave. We've already identified some of the biggest asset losers in 2008 were. And, in general, very prominent names still top the 2009 hedge fund rankings. Data shows that redemptions for April fell to $8.6 billion, down from the $15.7 billion redeemed in March. As we've said before, we think the major tidal wave is behind us and smaller ripples will continue until the system stabilizes (bar any unforeseen circumstances... which unfortunately we can't rule out quite yet). At the end of April, hedge fund assets in general were around $1.32 trillion.

Hedge Funds in general were +3.2% for the month of April.

SAC Capital (Steven Cohen): Their International fund was -0.8% for April and is now +9.9% year to date.

Pershing Square (Bill Ackman): International fund was +6.8% for April, and now +10.8% year to date. We've detailed a lot of Ackman's recent maneuvers, as he takes an active role in his Target and General Growth positions. Their performance breakdown shows that in terms of positions greater than 0.5% of their portfolio, they have 5 longs and 3 shorts.

Greenlight Capital (David Einhorn): Einhorn's crew had a solid April, +9%, bringing them up to +13.8% for 2009. We recently covered his new portfolio positions & investor letter.

TPG Axon: Their LP was -2% for April and sits at +4.3% year-to-date.

Tiger Global (Chase Coleman): The Tigers were -12.9% for April and are now -8.1% for 2009. Their pain can be sourced from their short positions in REITs and financials. Tiger still has high conviction in those shorts despite the market rally, as we wrote about when we recently covered Tiger's latest investor letter.

Clarium Capital (Peter Thiel): This global macro hedge fund was +1.7% for April and are now -0.3% year-to-date. When we covered Clarium's April performance, we noted that they were net short US equities, among other positions.

Lastly, we note that Renaissance Technologies (Jim Simons) has had a rough year in some of their funds, along with many other quants. Their RIEF fund was down over 9% for April and is down over 17% for 2009 as of the end of April.

If you missed our previous updates, we've also covered some March '09 numbers, February '09 numbers, as well as 2008 year end numbers.

Tuesday, May 12, 2009

Goldman Sachs Conviction Buy List Changes

With the market ramping up the past few months, Goldman Sachs has been quite busy editing their coveted Conviction Buy List. For those unaware, Goldman's Buy List is simply a list of the names they deem to be 'the best' at present. They also have a Conviction Sell List, which outlines stocks to be avoided at all costs. Just last week, we went through and updated the changes to their Conviction Buy List. And, here we are yet again with another round of some additions and a lot of subtractions.

Before we begin, do note that we don't necessarily place too much weight on individual analyst calls. As evidenced by the massive market decline of 2008, many analysts were behind the ball and were reactive rather than proactive. As such, we take it all with a grain of salt. That said, we also realize that many of these reports can move markets and influence opinion of various stocks, which is why we cover them. As we like to say, you have to "trade the perception, not the reality."

Conviction Buy List

Additions to the Buy List: International Game Technology (IGT), Bank of New York Mellon (BK), Teradyne (TER), Tenneco (TEN), Devon Energy (DVN), Owens Illinois (OI), and Lincoln National (LNC).

Stocks removed from the Buy List: Federal Mogul (FDML), Penn National Gaming (PENN), Chesapeake Energy (CHK), Northern Trust (NTRS), PMC Sierra (PMCS), Biiogen Idec (BIIB), Gap (GPS), L-3 Communications (LLL), Dollar Tree (DLTR), EOG Resources (EOG) and W. W. Grainger (GWW).

There are a lot of moves listed above, but let's check in on some of the more extravagant and bold calls. Goldman has practically doubled IGT's price target from $11 to $20, which is somewhat hard to stomach given the fact that they supply casinos and Vegas is in massive amounts of pain. Originally, Goldman had IGT listed as neutral, so they've really changed their stance on this one. Interestingly enough, they removed Penn National Gaming (PENN) from their Buy List at the same time. While we realize that each company in the gaming segment should be treated as an individual entity, we can't help but notice the interesting dynamic here. Goldman still lists PENN as a buy, but it is no longer on their coveted list, most likely due to the recent earnings release.

In typical Wall Street fashion, we see that as the financials all rally back from the abyss, Goldman adds Bank of New York Mellon (BK) to their Conviction List. "Oh, everything's fine and dandy again, buy buy buy!" Where was this upgrade back on the lows? This is a textbook example of being reactionary rather than proactive. In fairness to them, we're being pretty harsh here because BK is only up 10% over the past 3 months and is considered to be in slightly better shape than most other financials out there. BK has surfaced in our coverage before when we looked at the gap between tangible common equity and tier 1 capital in some financials. While BK was added to their Conviction List, we curiously see Northern Trust (NTRS) removed from the Conviction List. Both of these financial institutions are perceived to be less risky and more stable than most of the other volatile financials out there. As such, it's interesting to note that Goldman currently favors BK over NTRS.

We also noted that Chesapeake Energy (CHK) has also been removed from the Conviction List, but still retains a buy rating from Goldman. You'll remember that last week we touched on the highest paid CEOs of 2008 and Aubrey McClendon of CHK controversially topped the list.

Also, we see that Biogen Idec (BIIB) has been removed from the Conviction Buy List. We highlight this because longer-term readers of ours will know that we've documented a large hedge fund presence in this name. Hedge fund Shumway Capital Partners had BIIB as their 5th largest holding in the fourth quarter of 2008. Additionally, rabblerouser and well-known activist Carl Icahn has a sizable position in BIIB, as he looks to shake things up there. Goldman still remains a regular buy rating on the name.

In another sizable call from Goldman, they have upgraded Tenneco (TEN) from neutral to buy and have added it to the Conviction List. Their price target on the name is now $10, way up from their previous $2.10 price target. Tenneco designs automotive emission controls and clearly Goldman sees a lot of upside in this name. In fact, their upgrade alone pretty much sent the stock up 10%.

In one last big call, we also see Goldman's big change of heart on shares of Lincoln National (LNC) as they upgrade it from sell all the way up to buy and add it to their Conviction List. This move is very perplexing, seeing how shares of LNC are already up over 80% in the last month. Again, we ask, where was this upgrade a month ago?

That about covers the major moves this time around, as we saw a lot of names removed from the Conviction Buy List. Make sure you also check out our update from last week where we outlined some of the other recent changes to Goldman's Conviction List. We'll continue to track the major movements on Goldman's coveted lists.

Bill Ackman of Pershing Square Talks General Growth Properties (GGWPQ) & Target (TGT)

Hedge fund manager Bill Ackman recently sat down with CNBC and gave his thoughts on two of his well publicized positions. In the first video, he talks about his stake in General Growth Properties where he has a position of $177 million in unsecured debt, 24% of the company's equity, and has been in talks regarding debtor in possession (DIP) financing. General Growth of course has filed for Chapter 11 bankruptcy. Ackman sees General Growth as having one of the premier commercial real estate portfolios in the country, as they have flagship malls in numerous key markets. He cites the fact that GGP (now trading as GGWPQ) has around 91-93% occupancy and has very strong cashflow. The credit crunch simply caused them problems and Ackman wants to see a better capital structure and reorganization. He feels that the company will not have to be liquidated and that bankrupcty courts will merely draw out the maturations on their debt and he hopes that current shareholders should come out ok. He sees some potential deleveraging afterward as well.

In the second video, Ackman touches on his big plan to get his slate of directors elected to the Target's (TGT) board. Ackman points out that while Target serves in the retail, grocery, and credit card business, none of their board members really have experience in these areas. Ackman seeks to rectify this by bringing in an impartial board, with each member having expertise in a certain area to fill the void. He also cites a big problem in that there is no 'ownership culture' on Target's board. He says that board members own less than 0.02% of Target stock and seeks to change this.

Ackman's struggle with his Target position has been well documented, as one of his hedge funds, Pershing Square IV, invests solely in shares of Target, and with leverage (through call options that expire at the $35 strike in 2011). Target is by far Pershing's overall largest position, as we detailed when we covered Pershing's portfolio. Their new portfolio will be released in a few days and we'll be updating their changes in our hedge fund tracking series. Since the losses, Ackman has ponied up $25 million of his own money into the position as well. It's very clear that he is doing whatever it takes to institute change at Target. He recently sent out a letter to Target shareholders as well.

His position in this name leaves him with ample lessons, as he recently stated, "The investment business is about being confident enough to know that you’re right and everyone else is wrong. Yet you have to be humble enough that you recognize when you’ve made a mistake. Earlier in my career, I think I had the confidence part pretty solid. But the humbleness part I had to learn."

For more thoughts from Ackman, also check out his interview with Charlie Rose.

Video 1 (GGP)

Video 2 (Target)

Monday, May 11, 2009

D.E. Shaw & Co Sells Owens Corning (OC) Shares (Per SEC Form 4 Filing)

Hedge fund firm D.E. Shaw & Co recently filed a Form 4 with the SEC that we wanted to update you on. D.E. Shaw & Co was selling Owens Corning (OC) shares on May 6th, 7th, and 8th. They sold at the prices of $18.4592, $19.7434, $16.3648, $17.6882, and $16.3806. The bulk of their sales were made at $18.xx and $16.xx. In total, Shaw sold 2,207,313 shares over those three days. As per the SEC filing, they now hold 10,887,829 shares after all their selling. You can also view D.E. Shaw's portfolio from Q4 2008 if you're curious as to what else they hold. As always, we'll continue to monitor their movements and will update their long equity portfolio in our hedge fund tracking series in a week or so.

D.E. Shaw & Co was founded in 1988 by David E. Shaw and manages around $33 billion as of December 1st 2008. They focus on intertwining technology and finance and are a hedge fund, private equity firm, and technology development shop all in one. In Alpha's hedge fund rankings, D.E. Shaw is ranked 6th in the world. Taken from their website, they invest “in a wide range of companies and financial instruments within both the major industrialized nations and a number of emerging markets. Its activities range from the deployment of investment strategies based on either mathematical models or human expertise to the acquisition of existing companies and the financing or development of new ones.”

Shaw himself oversees strategic maneuvers at the firm, but no longer is active in the day to day operations. He received his Ph.D. from Stanford University. Shaw also was recently seen on Forbes' billionaire list, as well as the list for Top 25 highest paid hedge fund managers for 2008. They employ mainly quantitative strategies and do a lot of statistical arbitrage. As such, we need to add a disclaimer to this article. We're merely presenting what they've filed with the SEC. Since they are primarily a quant firm, we don't know the rhyme or reason behind their moves.

Some notable former employees include Jeff Bezos (before founding and Lawrence Summers, who left the firm to serve on President Elect Obama’s economic team. Shaw has had a decent year thus far, seeing their Composite fund +0.8% for March and sitting at +5.59% year to date (through 3/31/09) as detailed in our March hedge fund performance numbers update. In terms of other activity, we touched on their SEC filing on Orient- Express Hotels (OEH) back in January (which is an ongoing saga). Lastly, for those of you potentially interested in working at such an outfit, check out some of Shaw's past interview questions.

Taken from Google Finance,

Owens Corning is "a producer of glass fiber reinforcements and other materials for composites and of residential and commercial building materials. The Company operates within two product categories: composites, which include the Composite Solutions segment and building materials, which includes its insulating systems, roofing and asphalt and other building materials and services reportable segments."

Seth Klarman's Baupost Group Sells Some OMN - Omnova Solutions (Per Amended 13G Filing)

Hedge fund Baupost Group has filed an amended 13G on Omnova Solutions (OMN) and has disclosed a 7.4% ownership stake due to activity on April 30th, 2009. They now own 3,242,800 shares. This is not a new position for Klarman, as they previously owned 5,920,750 shares. That 5.9 million shares figure was as of December 31st, 2008 when we looked at Baupost's entire portfolio. Since December, Baupost has obviously decreased their position in Omnova. As you can see, we've covered Klarman's moves and will update his entire long portfolio when it is filed in a week or two via 13F filing.

Klarman has been quite busy lately, filing a flurry of 13D's and 13G's with the SEC. Most recently, we noted that Baupost has gone activist on both their Breitburn stake and their Facet Biotech stake. In addition to their filings, Klarman himself sat down and gave a video presentation that outlines his investment philosophies and thoughts on the current market.

Baupost Group's outperformance over the years is one of the main reasons that we selected them as one of the hedge funds in our custom Market Folly portfolio. Our model hedge fund portfolio has seen a total return of 194% since mid-2002 and is returning 17% annualized thanks in part to Baupost. We created the model portfolio with Alphaclone, where you can replicate hedge fund positions & portfolios for your own investment.

Klarman's hedge fund was recently ranked 13th in the 2009 hedge fund rankings, jumping way up from being ranked 49th in Alpha's 2008 rankings. Klarman has always considered himself a value investor and has been patient through the market turmoil. The past few years they have had nearly half their $14 billion in assets in cash. But, with turmoil comes opportunity and Baupost's cash has been gradually deployed. To see why they've begun deploying capital, we'll leave you with some of Klarman's additional thoughts on recent market action in his interview with Harvard Business School and his thoughts from Value Investor Insight. Klarman once wrote, "At Baupost, we are big fans of fear, and in investing, it is clearly better to be scared than sorry." His investment process is also further detailed in his hard to find book Margin of Safety.

Taken from Google Finance,

Omnova Solutions is "a provider of emulsion polymers, specialty chemicals and decorative and functional surfaces for a variety of commercial, industrial and residential end uses. The Company’s products provide a range of functional and aesthetic benefits to products that people use daily. OMNOVA operates in two business segments: Performance Chemicals and Decorative Products."