Friday, November 13, 2009

Need Help From Readers: Which Hedge Funds To Track First?

Yep, it's hedge fund 13F filing season for the third quarter of 2009. We will have no life for the next week or two, but it's okay because let's face it... we love tracking hedge funds. Earlier this morning, we posted up a list of hedge funds whose portfolios we'll update.

We have two simple questions for you:

1. Which hedge funds do you want us to cover first?

2. Besides the ones already on our list, what other hedge funds do you want us to track?

You are the ones reading, so tell us what you want to see!

Site visitors, please click on the 'comments' button below this post and let your voice be heard.
RSS readers, come to the blog to post up your comment, or email us.
Email newsletter readers: Simply reply to the daily email you receive from us.
Twitter followers: Just '@' reply to us with your picks.

Thanks for your help!

Hedge Fund 13F Filings: Q3 2009 Portfolio Tracking

This post is the preface to the series we will be doing in the coming weeks that details what many prominent hedge funds have been up to in the third quarter of 2009 as per their 13F filing.

Four times a year (once each quarter), hedge funds & asset managers with greater than $100 million AUM (assets under management) are required to report to the SEC their long holdings from the previous quarter. These filings do not show the funds' short positions and require them to disclose their long holdings in equity markets. Additionally, they are required to file various puts or calls purchased in the options market as well as notes & bonds. These filings do not cover commodities, currencies, or other markets. So, we just wanted to clarify that for people new to 13F filings.

We check these 13F filings quarterly just to get a sense as to where these funds are putting their money. If you just sit down and do some simple number crunching between this quarter's 13F and the one prior, you can see exactly what everyone has been up to. And, if you create a cloned portfolio based on these top hedge fund holdings, you can see 26.1% annualized returns like our Market Folly portfolio created with Alphaclone.

Please note that these 13F's should be treated as a lagging indicator simply because the 13F's that are being released currently (November 12th-21st 2009) show the funds' portfolio holdings as of September 30th, 2009. So, in the past month and a half, they could have completely changed their portfolio. But, at the same time, its easy to see which sectors they are flocking to and what their concentrated positions are. Click on the links below to be taken to the respective hedge fund's portfolio.

We like to specifically follow equity focused hedge funds as they are the easiest to track. We focus on value based (or growth-at-a-reasonable-price) hedge funds in the hope that they won't experience ridiculously high turnover and thus allow us to somewhat track their movements as they build up concentrated positions. Specifically, we follow the 'Tiger Cubs' (otherwise known as the proteges of former hedge fund Tiger Management legend Julian Robertson). Many of these former proteges/right-hand men have started their own funds and here are the ones we've been following.

- John Griffin's Blue Ridge Capital
- Stephen Mandel's Lone Pine Capital
- Lee Ainslie's Maverick Capital
- Andreas Halvorsen's Viking Global
- Chase Coleman's Tiger Global
- Shumway Capital Partners (Chris Shumway)
- Philippe Laffont's Coatue Capital Management
- David Gerstenhaber's Argonaut Capital Management
- Charles Anderson's Fox Point Capital Management
- Jonathan Auerbach's Hound Partners

Additionally, we also like to follow the Commodities Corporation "offspring" which have gone off to start their own funds and typically employ a global macro strategy. We don't track them for their equity portfolios since they typically deal in futures, but we like to see what sectors they might be flocking to and whether or not they have a large allocation to US equities.

- Tudor Investment Corp (Paul Tudor Jones)
- Moore Capital Management (Louis Bacon)
- Caxton Associates (Bruce Kovner)

Additionally, we like to follow other well known investment gurus. These include:

- Warren Buffett
- Carl Icahn
- George Soros

Next, there is an assortment of funds that employ various strategies ranging from activist to global macro and often run concentrated portfolios. We track some of these funds due to their solid returns over the years, while we track others due to the spotlight that has been cast on them during the crisis.

- Bret Barakett's Tremblant Capital
- Peter Thiel's Clarium Capital
- Philip Falcone's Harbinger Capital Partners
- Boone Pickens' BP Capital
- John Paulson's Paulson & Co
- Barry Rosenstein's Jana Partners
- Eric Mindich's Eton Park Capital
- Farallon Capital Management (Thomas Steyer)
- Raj Rajaratnam's Galleon Group (they have already liquidated their portfolios but we will post up what they previously held as many readers have already asked for coverage of this)
- Ken Griffin's Citadel Investment Group
- Jeffrey Gendell's Tontine Associates

A few value & activist funds:

- Seth Klarman's Baupost Group
- David Einhorn's Greenlight Capital
- Dan Loeb's Third Point LLC
- Bill Ackman's Pershing Square Capital Management

For our readers, we also track some quant and highly active trading funds. We do not track these firms to gain insight for portfolio investing ideas. Instead, it's merely for fun because for whatever reason, people like to see what they are doing. It's basically useless to track them due to their high frequency trading nature and none of us could really tell you the rhyme or reason behind any one of their positions.

- Jim Simons' Renaissance Technologies
- Steven Cohen's SAC Capital
- David Shaw's D.E. Shaw & Co.

We also track some managers who previously worked at funds mentioned throughout the list above, but now have struck out on their own. As they were some of the brains behind the solid returns of some funds listed above, we feel it's only appropriate to track them now.

- David Stemerman's Conatus Capital (ex-Lone Pine)
- Anand Parekh's Alyeska Investment Group (ex-Citadel)
- Matt Iorio's White Elm Capital (ex-Lone Pine)
- Lee Hobson's Highside Capital Management (ex-Maverick)
- Roberto Mignone's Bridger Management (ex-Blue Ridge)
- David Gallo's Valinor Management

We've also just recently started to track another set of funds due to high demand from our readers. While Market Folly is only a team of 1, we'll try our best to crank out as much hedge fund content as we can.

- Passport Capital (John Burbank)
- Sprott Asset Management (Eric Sprott)
- Balyasny Asset Management (Dmitry Balyasny)

Over the coming weeks we'll touch on some of the important position moves these funds and market gurus have made. Our hedge fund coverage now spans well over 40+ funds. If you would like to see a specific hedge fund covered here on, post up a comment in the comments section below. We're always looking to add more funds that readers would like to see, so please drop in your suggestions.

Last, but not least, we're always looking for people to help us cover these hedge funds, as it gets to be a bit tedious (this is a one-man show here). If you're interested in helping out posting up 13F information or have resources worth sharing, please get in contact with us at the top of the site. The hedge fund tracking series third quarter 2009 edition starts today, so spread the word and check back daily.

First up, Seth Klarman's Baupost Group (in a separate post).

Ten Rules For Successful Investing

The following is a guest post from Keith Fitz-Gerald, chief investment strategist of Money Morning.


With all the financial woes in the global economy, the worst thing an investor can do is to “freeze up.” With all the ups and downs in the market, it’s all too easy for investors to allow their emotions to take control. That’s when the smallest mistakes turn into the biggest mistakes.

There’s one antidote for this problem … remembering a few basic rules. Just embrace the 10 ideas that follow and you’ll be in line to make some serious money in the months ahead.

Rule Number 1: Invest on the Right Side of Major Economic Trends:That old investing adageDon’t fight the Fed” serves as a good example here. Rising interest-rate environments make meaningful gains difficult to sustain – unless you know what to look for. Far too many investors got it wrong in the 2000-2003 and 2008-2009 periods by betting on growth stocks in a recessionary economy, and they’re still getting it wrong. Those investors are likely to get burned again should the economy slow even more, despite the government-bailout and federal-stimulus efforts. Make sure to analyze all of the other major global trends, as well – and ride the ones that are truly unstoppable. You’ll know them when you see them, because they’ll have trillions of dollars in new capital flowing directly at them – investment plays in such areas as infrastructure, inflation, energy, food, and water (both supply and purity) are great examples.

Rule Number 2: Sell Your Winners: This may seem counterintuitive, but – if you want to succeed – you must sell your winners. Rule Number 6 – thinking like a plumber to prevent losses – is only part of the success equation. To be really effective, you have to take profits, too. That way, you get more capital that you can put to work. Think of it this way – Safeway Inc. (SWY) regularly replenishes the inventory in its Produce Department to keep it fresh. You should do the same with the “inventory” in your portfolio because, if you let your stocks sit on the shelf too long, they’ll eventually go badjust like fruit that’s past its expiration date.

Rule Number 3: Always Sit in an Exit Row:This rule goes hand in hand with Rule Number 2. One of the most common problems investors have is not knowing when to sell. Sometimes, they’ll let a big loss get out of control (which violates Rule Number 6) – or, worse, they’ll notch a big gain and then sit on the investment so long that it sneakily turns into a loss. The bottom line is that, up or down, you should always have planned exit points when you initiate a position – and enforce them with "protective stops,"adjusting them as prices move in your favor (but never when they go against you).

Rule Number 4: Your Broker is a Salesman. So unless you know you want to buy what he has, don’t go shopping today! Wall Street is not a service business. Brokers exist for one reason and one reason only – to sell you stuff and make money . . . from your money. And the more of your money you give to them, the less you have to make more for yourself. So buy only what you want and what fits your goals and objectives – not the “stock of the day ” the broker is pushing to meet his weekly quota.

Rule Number 5: Invest for High Yields:Contrary to popular belief, rather than investing for capital gains, you should aim for the highest possible yields and the most certainty you can find. The real secret to wealth-building is compounding small gains over long periods of time. In fact, studies show that compound returns can outperform so-called "growth stocks" by as much as 22-to-1. Furthermore, dividends account for a huge percentage of total returnsvarying studies have claimed anywhere from 60% to as much as 97% over time. So, don’t ignore them!

Rule Number 6: Think Like a Plumber: Big losses – like six inches of water in your living room – are expensive and can set you back years. Professional traders – and I’m not including the risk-junkie cowboys who drove the derivatives mess to heck in a handbasket – understand this. And because they do, they focus the majority of their efforts on avoiding losses, instead of on capturing gains. It’s counter-intuitive, but it really makes a difference. Besides, if you keep those portfolio pipes from bursting, you won’t have to worry about your assets leaking away, drip by drip.

Rule Number 7: Buy Value: Buying when the underlying value is “right” can mean the difference between pathetic single-digit gain and truly market-beating returns. It’s hard to make money when valuations – as reflected by Price/Earnings (P/E) ratios are greater than 20. More normal valuations sit in the 12 to 14 range. However, to really make money, you need to buy when valuations have been beaten down into the single digits – assuming, of course, that the company’s underlying value is real. Doing so puts the odds strongly in your favor and can dramatically boost returns.

Rule Number 8: Retirement is a Lifestyle Issue, Not a Monetary One: When

most people think about retirement, they think about safety. Big mistake. The single biggest problem facing us today is running out of money before we run out of life. If you’ve followed Rule Number 9, this shouldn’t be a problem. However, if you’ve thought about safety and have not invested enough, what you’re really doing is crippling your ability to earn future income – income you’re going to need in order to eat, keep a roof over your head, and provide lifelong life health care. Oh yeah, and have some fun.

Rule Number 9: Start Early and Leave Your Money Alone For as Long as Possible: This is not the same thing as "buy-and-hold" investing. Buy-and-hold is not an investing strategy, it’s a marketing gimmick – and, these days, it’s more like “hope-and-pray” investing, anyway. The world’s most successful investors – think Jim Rogers, Warren Buffet and the late Sir John Templeton, to name a few – don’t buy and hold. And I don’t believe you should, either. These experts buy and “manage,” confining themselves to stocks and strategies that meet their specific objectives. Given that one of our critical objectives is to have our money working hard for us rather than us working hard for it, the point is that you want to start as early in your life as possible and never miss an opportunity to invest. The longer you have your money in play, the better you will be paid when you’re ready to cash out!

Rule Number 10: All Investments Contain Risks – But Not All Investments

Contain the Same Risks:Despite all my talk about avoiding losses, the simple truth is this: If you want to grow your wealth, you have to take on risk. It’s unavoidable. Every investment involves risk – the only questions are how much and under what circumstances. Remember, success is not about how much money you can make, but about how much money you keep. As such, the true secret of wealth-building is taking risk properly.

Indeed, the late legendary U.S. Army Gen. George S. Patton Jr., once said: “There is nothing wrong with taking risks.” But he also cautioned: “That’s quite different from being rash.” I completely agree. What’s more, I think that Patton would have agreed with my belief that if you want to be successful in anything, you have to take a certain amount of risk every day. It’s just a fact of life.

Yet, most folks are unwilling to do so – or they spread themselves too thin, and over-diversify, all with the goal of “protecting” themselves. Unfortunately, by doing so, these investors actually set themselves up for failure – not because they take too much risk, but because they don’t concentrate the risks they do take in the right places!

What are those “right” spots? They’re the investments that can provide the potential rewards to justify the risks the investor has taken.


The above was a guest post from Money Morning, thanks to them for an interesting read! Keith Fitz-Gerald (the author of the post) has also recently released his new book, so check out Fiscal Hangover: How to Profit From The New Global Economy.

What We're Reading, Friday The 13th Edition

Random sidenote: This is the third time this year we've had a Friday the 13th... just found that odd and wanted to highlight it. (Others were in February & March). Anyways, onto the links...

John Murphy, an award winning book author, recently provided a free seminar on technical analysis [INO TV]

Investing by the seat of their pants [Abnormal Returns]

What Galleon teaches us [Eric Jackson's Breakout Performance]

Interview with Alice Schroeder re: Warren Buffett's biggest weakness [Motley Fool]

Hedge fund SAC Capital says no insider trading there [Bloomberg]

Hedge funds ready for new boom in start-ups [Bloomberg]

May buy and hold R.I.P. ? [Yacktman]

Interview with prominent Indian value investor Chetan Parikh [Simoleon Sense]

Thursday, November 12, 2009

Gold Could Take A Breather; Where To Place Stops

The guys at MarketClub have been all over the move in gold and initially outlined a price target of $1,110 for the precious metal. Well that target was hit a few days ago and in their latest gold technical analysis video they see gold 'flattening out' a little bit as it could likely consolidate and trade sideways for a while before continuing its trend higher.

They note that it's always prudent to lock in some gains and protect them by using stops. If you're a longer term player in the metal, you can use more flexible stops and they suggest placing one below the most recent low at around $1,030 or so. If you're playing this as more of a shorter-term trade, then you'll obviously want to lock in your profit quicker with a more conservative stop right around $1,095 or so. Watch the video to see what they say about placing stops in gold.

They also highlight that you should move stops up as the market heads higher to continue to lock in gains. The pattern in gold that built up over multiple months is a powerful base that could propel the precious metal to their price target of around $1,250-1,300. If you're not playing the metal directly, keep in mind you can play the popular exchange traded fund GLD. Hedge fund manager David Einhorn of Greenlight Capital prefers storing physical gold, while John Paulson's fund Paulson & Co has bought $4.3 billion worth of gold investments. Either way, the guys at Market Club see gold cooling off for a bit here before setting up for another run higher.

Hedge Fund Lansdowne Partners Favors Large Caps In Developed Countries

Lansdowne Partners have been regularly rated as one of the best hedge fund managers in London. Whilst they do have global macro and long-only funds they specialize in long-short stock picking. Their flagship, the UK Equity Fund, has returned an impressive 19.37% annualized since 2001 (see table below). Additionally, we recently saw that their UK strategy fund was up 0.32% for the month of October and is now up 22.19% for the year.

YTD 6m 1y 3y 5y
Lansdowne UK Equity Fund 22.9% 14.0% 24.1% 71.4% 161.9%

Source: Trustnet Offshore

One of the interesting things about Lansdowne is that they currently have a much more bullish outlook on the economy and equities than many other hedge funds we follow on Market Folly. Lansdowne are strongly opposed to a downbeat view and point to a number of factors that they see as positive for equities and the economy in general.

They argue that current valuations in both absolute terms and certainly relative to government and corporate bonds are compelling. They believe that it is premature to worry about growth disappointments because there are still large boosts to growth yet to come from the normalization of the inventory cycle and importantly from the lagged response to the expansive fiscal and monetary actions. In addition, they argue that interest rates are unlikely to rise for some time because the authorities are likely to want to see firm evidence of a recovery. The output gap - estimated to be approximately 4% in the developed markets - means that inflationary pressures are likely to remain muted for some time thereby extending the period that policy can remain accommodative.

In their September 2009 report, Lansdowne argue that a combination of five factors make large-cap companies in developed countries particularly attractive at the moment. Firstly, large companies have done particularly well at cutting costs during the recession, especially labor costs. Consequently, earnings (and more importantly cash flows) have been protected. Secondly, there will be a positive, lagged impact from the fall in commodity prices on input costs mostly from natural gas and oil. Thirdly, currency tailwinds will help US and UK denominated companies where their respective currencies have been weak over the last 12 months. Fourthly, stronger companies will capture market share from weaker competitors; particularly from those who have over-extended balance sheets and are financially constrained. In addition, merger and acquisition opportunities are now back on the agenda. Finally, emerging markets remain a strategically important and ever increasing focus of growth for multinational companies with strong brands.

Lansdowne say that they continue to discover a very large range of potential investment opportunities. In case you were wondering, all this bullishness is not just talk. In their October report, Lansdowne noted that their gross long exposure level was 149% of NAV, up from the previous month (it also includes a 10% short futures position). This is extremely close to the top of their stated range (150%) but even so, they were not inclined to take profits believing that further upside was achievable. Gross short positions were 72% of NAV. Compare that exposure with, for example, David Einhorn's Greenlight Capital who recently disclosed they were 99% long 59% short. Lansdowne say that they are likely to remain bullish until the authorities step back from their accommodative stance and raise interest rates, which they believe is unlikely in the short-term.

We can get an idea of the type of large-cap company that Landowne believe will prosper going forward because they detail their largest 11 holdings in their UK Strategic Equity Fund in their September letter:

Barclays, BHP Billiton, Coca Cola, Colgate, Goldman Sachs, International Business Machines, JP Morgan, Palmolive, Rio Tinto, Roche, Wells Fargo

Plenty of US large-caps there for a fund with a supposed UK focus! In terms of sector and thematic positioning from their September update, they maintained exposure to the banking and mining sectors. Lansdowne believe that the biggest exogenous threat to their world view would be 'cost push inflation' arising from the commodity markets. In order to combat that threat they own out-of-the money call options on oil and miners like BHP Billiton and Rio Tinto.

In their October letter, they note that they added to their positions in Lloyds and Barclays on weakness. To hedge this, they also added to their shorts in the insurance sector. They also boosted their position in Roche up "to a full weighting" after shares slumped around Q3 sales. They think the pharmaceutical sector is intriguing here after underperforming for many years.

Now let's turn to look at what we can learn about Lansdowne's holdings in the UK market from their regulatory filings to the London Stock Market. Our primer on understanding the UK disclosure system can be found here. Remember that there is no equivalent of the 13F form for hedge funds in the UK and generally speaking hedge funds only have to disclose long positions that are greater than 3 percent of a company's outstanding equity. It's important to recognize that the UK disclosure system provides us with a distorted view of hedge fund holdings as large-cap holdings are rarely seen because they often do not breach the 3 percent threshold but investments in mid-cap and particularly small-cap companies show up prominently. Of course this information is still useful because when a hedge fund builds a large stake in a small or medium sized company, it demonstrates a great deal of commitment to the investment thesis as such positions can be difficult to exit at speed, particularly in a down market.

Company Symbol Date Shares % of Equity
Inmarsat ISAT 01/07/2007 46001346 10.06

03/01/2008 50958170 11.14

14/05/2009 55810250 12.14

02/09/2009 59942059 13.04

The Evolution Group EVG 27/04/2009 11305306 5.03

Henderson Group HGG 31/10/2008 45098010 6.22

Proximangen Neuroscience PRX 20/03/2007 1520270 7.59

25/11/2008 3156723 14.63

24/06/2009 14849580 25.92

Oxford Catalysts Group OCG 16/11/2006 3106609 8.32

10/10/2007 5174586 12.76

25/01/2008 5309586 13.09

20/11/2008 10109586 16.95

Renewable Energy REH 15/07/2008 5633166 8.26

Afren AFR 15/04/2008 47208333 12.83

07/05/2009 82,208,333 11.53

29/05/2009 78,139,283 10.91

Heritage Oil HOIL 03/04/2008 18996540 7.45

22/06/2009 28776161 10.05

IP Group IPO 08/05/2007 24674785 9.99

04/02/2008 32924785 13.15

It's interesting that Lansdowne holds a big 13 percent chunk of Inmarsat (ISAT). ISAT provides global mobile and transportable broadband communication services to maritime, aeronautical and land mobile users. Many believe that activist hedge fund Harbinger Capital is likely to make a formal offer for Inmarsat anytime soon. Harbinger currently hold a 29 percent stake in the company as we detailed in our article on Harbinger's activist positions in the UK.

Renewable Energy is a position that Lansdowne share with Paul Tudor Jones' hedge fund Tudor BVI Global. (See our article on Tudor's holdings in the UK here). Renewable Energy Holdings owns and operates windfarms in Germany and Wales. The Company’s subsidiaries are also involved in developing wave power technology and as a by-product, desalinated water. Oxford Catalysts Group PLC has close links with the University of Oxford and is engaged in the design and development of catalysts and microchannel systems. It develops technology for the production of clean fuels from both conventional fossil fuels and renewable sources, such as biowaste. IP Group helps owners of intellectual property like universities to develop commercial ventures through the formation of long-term partnerships and the management of venture funds. They focus on early-stage United Kingdom technology and pharmaceutical companies.

The holdings in Herderson Group and Evolution Group provide support for the idea that Lansdowne believe in further recovery in the financial sector. Henderson Group Plc is a United Kingdom-based company engaged in providing investment management services. The Evolution Group through its subsidiaries is involved in investment banking and also provides private client investment management.

Both Afren and Heritage are independent companies involved in the exploration and production of oil and gas. Afren has an African focus while Heritage is involved in Africa, the Middle East, Russia and South Asia.

Proximagen Neuroscience plc is focused on developing drugs for the treatment of age-related neurodegenerative disorders, including Parkinson's disease and Alzheimer's disease.

That ends our first look at Lansdowne Partners. As always, we will be continuing our tracking series where we look at the positions that prominent hedge fund managers hold in UK markets. If you've missed some of our previous posts, make sure you check out the holdings of Harbinger Capital Partners, Stephen Mandel's Lone Pine Capital, Ken Griffin’s Citadel , Louis Bacon's Moore Capital Management and Paul Tudor Jones’s Tudor Investment Corp .

If you're unfamiliar with our new series tracking UK positions, check out
our preface here. We have also covered the potential for hedge fund activism in the UK investment trust sector and London based, GLC Ltd.

Hedge Fund Paulson & Co Buys Even More Cadbury (CBY)

Literally just yesterday we touched on the fact that hedge fund manager John Paulson is betting on the Cadbury (CBY) buyout by buying shares. Well, he has just bought even more. Paulson purchased 6,395,000 more shares at a price of 759.96 pence each. This brings his total securities exposure to 26,768,256 shares. As we touched on yesterday, Paulson also has 8,116,401 shares of exposure through CFD derivatives. The hedge fund now has an aggregate ownership stake of 2.54% of the company with 34,884,657 shares represented. Here are screenshots of the regulatory filings:

(click to enlarge)

(click to enlarge)

Paulson & Co has now bought shares of CBY as the price heads higher, implying that they are confident that Cadbury will receive a higher bid from suitor Kraft Foods (KFT). As always we'll continue to monitor the situation. Stay tuned this coming week as we'll be starting the next leg of our hedge fund portfolio tracking series where we'll update the arbitrage heavy equity portfolio of John Paulson's firm and many other prominent hedge funds. In the mean time, you can read up on Paulson's big bet against the US dollar.

Wednesday, November 11, 2009

How Long Can The Rally Last?

First and foremost, no one can deny that the trend right now is up. The guys over at MarketClub have placed an emphasis on the saying, "don't fight the tape." At the same time though, they wonder how long the market rally can really last. They highlight the 50% fibonacci retracement as potential resistance ahead at Dow 10,339 in their latest market technical analysis video. They don't debate that the trend is up. However, they feel that the market has the potential to begin to roll-over and so they're watching cautiously. The market has been stair-stepping higher and each sell-off is met with more buying. What's important to watch is those levels where the market reversed and headed higher yet again. If the market takes out those mini-dip levels to the downside, they say that could be your signal it is starting to roll over. But still, "don't fight the tape." Wait for the weakness at the levels they outline in the video.

Also, if you're interested in technical analysis on specific equities, they recently put out a video on Research in Motion (RIMM). They think this name could potentially trade all the way down to the $40s, even after their announcement of a share buyback. The current technical pattern is bearish for RIMM in the coming weeks according to the video.

Lastly, they turn to commodities. In a crude oil video, they are taking a look at classic charting patterns that are taking shape. They note to pay attention to the MACD, saying that if it crosses the average it will be bullish. Aditionally, the commodity itself has gone into a flag pattern which has the potential to send oil much higher. So, they say to keep an eye on the chart. See their crude oil analysis here.

John Paulson's Latest Bet: Doubling Down On Cadbury (CBY)

John Paulson's hedge fund Paulson & Co has doubled down on their Cadbury (CBY) stake. According to UK disclosures, Paulson emphatically boosted his stake in Cadbury to 2.1% of the company as he purchased 14.8 million shares at a price of 759.59 pence each in the UK market and he now owns a total of 28.5 million shares. This means he bought 112 million pounds sterling (or $187 million) worth of shares. Cadbury of course was the recent subject of a bid from Kraft Foods (KFT) to take over the company. Paulson seems to be wagering that not only will a buyout happen, but it will come at a higher bid. Kraft's stock and cash offer was for 720p while Cadbury was trading around 763p. Needless to say, it appears many besides Paulson think that given Cadbury's rejection of the initial bid, a higher bid is inevitable. We note that Paulson & Co is not the only prominent hedge fund in this play as Eric Mindich's Eton Park Capital had been buying shares in September for 800 pence each.

While hedge fund Paulson & Co has been thrust into the spotlight over the past 2 years for their bet against subprime or their more recent big gold purchase, many seem to forget or overlook the fact that Paulson's equity strategy involves merger arbitrage and this type of play is right up his alley. While we cannot verify that Paulson & Co specifically has done this, it would be pretty safe to assume that like most funds pursuing this trade, he would go long Cadbury and then short Kraft. And, as FTAlphaville points out, "the short base in Kraft - a measure of how much of its total share pool is on loan - has risen by 45 per cent in the past week. Meanwhile, utilisation - the amount of stock available to borrow that has actually been borrowed - now stands at 4.2 per cent." Clearly, the merger-arb players are out in full force.

Interestingly enough, 1.49% of Paulson's ownership stake in Cadbury is represented by securities, while 0.59% of their ownership stake is represented by derivatives, and in particular, CFD's (contract for difference). We've previously examined what CFDs are as it is unique to the UK and hedge funds often use this derivative to help establish a position in a company. This primer of course goes right along with our introduction on how to track a hedge fund's UK positions. We're expanding our portfolio tracking coverage to include stakes held in other markets and many prominent hedge funds often hold positions in UK based companies. To see what some of the largest hedge funds are buying and selling in the UK, head to our most recent post covering Moore Capital Management, Louis Bacon's hedge fund firm.

In other notable activity, Paulson also recently invested $77.9 million in insurer Conseco (CNO). This purchase comes from 16.4 million common shares as well as warrants to purchase 5 million additional shares in a new offering that was announced October 14th that will dilute current shareholders. This gives Paulson & Co a 9.9% stake in the company.

So now we wait to see if Paulson can get that higher bid he is hoping for in his most recent play. For more on John Paulson and his hedge fund, we highly recommend checking out WSJ columnist Gregory Zuckerman's new book, The Greatest Trade Ever, where he had exclusive access to Paulson in order to pen the story behind his victorious subprime bet. And reportedly, Paulson is not necessarily happy with how the book turned out. You can read our book review here.

Taken from Google Finance,

Cadbury plc "formerly Cadbury Schweppes plc is a confectionery company. The Company is engaged in the confectionery business, with participation across the three categories of chocolate, gum and candy. The Company’s seven business units are Britain and Ireland, Middle East and Africa, North America, South America, Europe, Asia, and Pacific. Cadbury plc has developed a global portfolio of brands. The Company’s brands in chocolate are Cadbury Dairy Milk, Creme Egg, Flake, and Green & Black’s. Trident is the Company’s gum brand. Other gum brands include Hollywood, Stimorol, Dentyne, Clorets and Bubbaloo. Halls is a candy brand of the Company. Other brands are Maynards, The Natural Confectionery Co. and Cadbury Eclairs. On May 7, 2008, it completed the demerger of the Americas Beverages business, which became Dr Pepper Snapple Group, Inc. (DPS) following the demerger."

Hedge Fund Performances Report

Hat tip to ZeroHedge for posting this up recently. From HSBC here is a 'Hedge Weekly' report that details the performance figures of a plethora of hedge funds, including some of the funds we track here on Market Folly on a daily basis. It definitely is quite the compendium of information so check it out if you are interested in any funds.

Embedded below is the document (RSS & Email readers come to the blog to view it):

HedgeWeekly2009_No45 -

Also, you can download the .pdf here.

Other insightful hedge fund reports we've posted up recently include two Goldman Sachs reports including their hedge fund trend report, and their update on the best long & short strategies in the current market. Additionally, we covered Bank of America Merrill Lynch's compilation on what hedge funds have been buying & selling. As always, we'll continue to track hedge funds on a daily basis.

Tuesday, November 10, 2009

Hedge Fund Baupost Group: New Enzon Pharmaceutical Stake (ENZN)

Seth Klarman's well known hedge fund Baupost Group recently filed two separate 13G's with the SEC in which they updated positions. Firstly, we see that Baupost Group has initiated a brand new position. In a 13G filed due to activity on October 31st, 2009, we see that they have disclosed a 13.7% ownership stake in Enzon Pharmaceuticals (ENZN) with 6,228,130 shares. When we covered Baupost's portfolio via their 13F filing that summarized their positions as of June 30th, Enzon was not present. As such, they have started a new position in this name over the past four months. Interestingly enough, Enzon also recently announced they have agreed to sell their specialty pharma unit for $327 million.

Secondly, we also see that Baupost has disclosed a 14.72% ownership stake in Viastat (VSAT) with 4,652,631 shares. The filing was made due to activity on October 31st, 2009 and they have increased their position by over 278% as they previously held 1,229,057 shares back on June 30th of this year. So, in the past four months or so, Klarman has added 3,423,574 additional shares. Stay tuned next week as we'll be covering the new wave of portfolio disclosures hedge funds will be filing with the SEC (form 13F). This will be our first in-depth look at portfolios since June 30th, and we'll get a better feel as to what these funds have been up to. In the mean time, check out our coverage of Baupost's recent activity where we detailed their other portfolio moves as well as their sale of PDL Biopharma.

We track Baupost Group for their 20% annual compounded return and solid investing methodologies. They are one of the select few funds we have included in our Market Folly custom portfolio that is seeing over 20% annualized returns by combining 3 hedge fund portfolios into a cohesive whole. Head over to Alphaclone to see the hedge fund portfolio replication in action and to see which positions our portfolio is currently invested in (and will soon re-balance to). And if you want to learn how to invest like Seth Klarman, then we'd highly recommend picking up his very hard to find book, Margin of Safety where he provides a "how-to" on risk averse value investing.

Taken from Google Finance, "Enzon Pharmaceuticals, Inc. (Enzon) is a biopharmaceutical company focused on developing, manufacturing and commercializing of medicines for patients with cancer and other life-threatening conditions. The Company has a portfolio of four marketed products: Oncaspar, DepoCyt, Abelcet and Adagen. Enzon’s drug development programs utilize several approaches, including its PEGylation technology platform and the Locked Nucleic Acid (LNA) technology. The PEGylation technology was used to develop two of the Company’s products, Oncaspar and Adagen, and has created a royalty revenue stream from licensing partnerships for other products developed using the technology. The Company also engages in contract manufacturing for several pharmaceutical companies. The Company operates in three segments: Products, Royalties and Contract Manufacturing."

"ViaSat, Inc. is a producer of satellite and other wireless communications and networking systems to government and commercial customers. The Company is organized principally in three segments: government systems, commercial networks and satellite services. The Company’s government systems business is focused on network-centric government communications, where it develops and produces systems and specialized equipment for government customers for tactical data links, unmanned aerial vehicles, secure networking, signal processing and generation, and satellite communications applications. In its commercial networks segment, the Company develops and produces systems and products for consumer, enterprise and mobile (aviation and maritime) broadband customers. Its satellite services segment provides managed network satellite services to enterprise and mobile broadband customers."

Warren Buffett To Sell Union Pacific & Norfolk Southern Stakes (UNP & NSC)

Following Warren Buffett & Berkshire Hathaway's announcement of their Burlington Northern (BNI) purchase, we now see that he is set to make another round of moves in the railroad industry. As of last portfolio disclosures, Buffett owned shares in Burlington Northern, Union Pacific, and Norfolk Southern. Upon his impending acquisition of BNI, we now see that Berkshire Hathaway will sell their entire remaining 9.5 million shares of Union Pacific, a 2% stake in the company. Additionally, they will also sell their entire Norfolk Southern position of 1.9 million shares (or 1% of the company).

They will liquidate these positions between now and the impending transaction date for their BNI purchase as the news was revealed recently by Matthew K. Rose, chief executive of Burlington Northern. Buffett already owns 22.6% of BNI and will purchase the rest of the shares for $100 per share in cash and stock. In terms of other recent activity out of Buffett, we also saw that he has yet again sold shares of Moody's (MCO), his third sale this year. For more resources on Warren Buffett, check out Warren Buffet's recommended reading list, as well as the top 25 Warren Buffett quotes. Stay tuned next week as new disclosures (form 13F) will be filed with the SEC and we will update Berkshire's other portfolio activity.

Saut Strategy From Raymond James

Jeffrey Saut, chief investment strategist for Raymond James is back with his latest missive. This week's market commentary is entitled "I Should Have!?" and prods at the notion of coulda, woulda, shoulda as portfolio managers wished they had bought at Dow 8000. To that extent, we'll interject one of our own favorite quotes on the subject, "The opportunities clear in retrospect are often unclear in prospect."

Saut says that he doesn't believe that America is at the end of an era. He mentions that many commentators out there reference the period of the 1930's and while he does not think things are that bad, he definitely acknowledges we're in a tough spot. Saut notes that in his past weekly notes, they have wrongly been looking for a correction since the start of Q4. He then goes on to note that underinvested portfolio managers have had a hand in the melt up in stocks and they could possibly again as they are still very cash-rich.

Embedded below is Saut's investment strategy for the week of 11/9/09:

You can download the .pdf here.

Don't forget we're covering his investment strategy missives each week and you can check out his thoughts last week on a Dow Theory sell signal as well as his prior commentary.

Monday, November 9, 2009

Jim Chanos' Presentation: Ten Lessons From The Financial Crisis

If you're unfamiliar with Jim Chanos then here's what you need to know: He graduated from Yale and is well known for his short selling prowess where he puts a large focus on identifying fundamental flaws in valuation due to underestimated or unearthed problems within a given company. His most notable work in this regard comes from uncovering the issues at Enron. Having previously worked for other firms, he went on to found Kynikos which is Greek for "cynic," a very appropriate name given his strategy and prowess. We also recently covered an in-depth interview he did with the media if you would like to learn more about his thoughts.

Recently, Chanos delivered a presentation entitled "Ten Lessons From The Financial Crisis That Investors Will Soon Forget (If They Haven't Already!)" He delivered this at the second annual Value Investors Conference at the University of Virginia, an event put on by their McIntire School of Commerce and Darden School of Business. In addition to Chanos, numerous 'Tiger Cub' hedge fund managers were present as panel members and contributors. We'll have a post detailing the event tomorrow, but for now we wanted to post up the entirety of Chanos' presentation.

His talking points centered around the following:

- Borrowing short and lending long is still a bad idea
- Accounting matters (a lot)
- Conflicted rating agencies are still not unbiased
- Regulate the activities, not the actors
- Messrs. Glass & Seagall were right
- Too big to fail = too big to exist
- Capitalism on the upside & socialism on the downside = bad policy
- Quantitative easing has its cost
- Insurance without reserves is not insurance
- Shooting the messenger does not change reality

While a couple of his points obviously play to his role as a short seller, he still brings up very valid thoughts. The topic of the ratings agencies is one that has been hotly debated as many have pointed the fault-finger their way for their role in the financial crisis. David Einhorn of hedge fund Greenlight Capital has even shorted the ratings agencies. One of Chanos' points that we think investors actually *won't* forget is that 'helicopter finance' has a cost. Many prominent hedge fund managers (in addition to him) have harped on this point as the consequences of such actions will definitely come to fruition down the line. You have seen more and more people bring this to the front of the discussion and we have a feeling that people have actually started to realize the impact here. Lastly, we absolutely loved this line of his: "Too big to fail = too big to exist." Amen.

Embedded below is Jim Chanos' presentation, Ten Lessons From the Financial Crisis (RSS & Email readers come to the blog to view it:

Alternatively, you can download the .pdf here.

In addition to his solid presentation, we've also learned that Chanos is negative on the municipal bond market, saying that "state and local municipal finance are a mess and going to get worse... (the poor economy) is masking real problems in municipal cost structures." He cites the largest problem as healthcare and retirement benefits given to both local and state workers and as those people start to retire, the problem worsens. He believes that the Fed can (and will) ultimately bail them out if things get that bad. Obviously the muni-market has shown signs of cracking already and he is predicting the situation to deteriorate further so it will be something to keep an eye on.

For more on Chanos, you can check out his recent in-depth interview, as well as another lengthy interview he did in September. It's always good to check in on his thoughts, especially given his short bias and keen eye. While the media prominently focuses on long managers, Chanos is one of the few shorts that they seem to pay attention to.

Lastly, be sure to check out It is a hedge fund advocacy site with a focus on dispelling myths related to hedge funds and short selling created by Chanos. This site is certainly a step in the right direction in terms of removing the 'villainous' title hedge funds are often labeled with.

(Hat tip to My investing notebook for posting the presentation up).

Trading Setups: Charts On The Weekly Watchlist

Courtesy of the OptionAddict we see the latest compilation of his weekly watchlist where he identifies potential trading setups via technical analysis. He singles out breakdowns, breakouts, and numerous patterns. Definitely a great resource if you're looking for some swing trades.

Embedded below is the video (RSS & Email readers come to the blog to view it):

And if you're newer to technical analysis or just looking to refine your skills, check out the free trading course being offered via email by the guys over at Market Club. Or, you can just pick out some books from our technical analysis recommended reading list.

What We're Reading 11/9/09

David Einhorn of Greenlight Capital calls for CDS ban [FT]

Hedge fund giant surfaces in trading probe (SAC Capital) [Wall Street Journal]

A call for help: Alan Cohen of York Capital Management needs our help in a blood stem cell match [Distressed Debt Investing]

Interview with Hunter from [Simoleon Sense]

Do hedge funds identify and share profitable ideas? Wesley R. Gray, University of Chicago - Booth School of Business [White Paper - SSRN]