Friday, September 2, 2011

Dan Loeb's Third Point Outperforming, Reduces Exposure Yet Again

In early August, we noted how Dan Loeb's Third Point reduced equity exposure for the third consecutive month. That decision has certainly paid off as Loeb's fund was only down 2.8% in August compared to the S&P 500 which was down 5.4%. Year-to-date as of the end of August, Third Point is up 3.9% while the S&P is down 1.8%.

Reduced Exposure for Fourth Straight Month

At the end of August, Third Point was only 17.7% net long equities, down even further from their 23.3% net long exposure back in July. Their largest net long exposure comes in technology at 6.5% and basic materials at 3.5%. Third Point is net short industrials (-1.5%) and utilities (-0.6%).

In credit, Loeb's Offshore Fund is 18.5% net long, a slight decrease from last month. They continue to be net short government securities (-10.3%) and have their largest net long exposure in asset backed securities (+17.3%).

Geographically, Third Point is net long the Americas at 50%, net short EMEA at -4% and net short Asia at -2%.

Third Point's Outperformance

So while decreased exposure to risk certainly has helped Loeb outperform in this volatile market, his winners the past month include gold, short A, CVR Energy (CVI), Barrick Gold (ABX), and short B.

It should come as no surprise that their gold related investments have helped them outperform as the precious metal rocketed higher as market volatility increased. Not to mention, gold has been one of Third Point's largest positions for some time now.

Top Positions

- gold
- Delphi
- CIT Group (multiple securities held)
- Technicolor (multiple securities held)
- El Paso (EP)

The most notable change in Third Point's top positions since last month is the absence of Mosaic (MOS). There's no way to know exactly why because they could have reduced their position size, other positions could have appreciated more, or they could have bought more of some of their top holdings.

Third Point originally bought MOS on the secondary when the Cargill family unloaded shares at $65 per share. The hedge fund subsequently 'bought the dip' in MOS when it traded down to around $60. During August, MOS traded as low as $55.70, and currently trades around $69.50.

Either way, Third Point's top holdings have largely been what you see above as they wait for Delphi to go public and El Paso to split up.

Chasing Madoff Trailer: Documentary About Harry Markopolos Exposing Bernie Madoff's Ponzi Scheme

Below is the trailer for the new documentary Chasing Madoff which was released on August 26th, 2011. It details the story of Bernie Madoff's $18 billion ponzi scheme and how Harry Markopolos spent ten years trying to expose the fraud.

Directed by Jeff Prosserman, it seems that the documentary is based on Harry Markopolos' book, No One Would Listen: A True Financial Thriller. You can also read our review of the book here.

The trailer for Chasing Madoff is embedded below (email readers come to the site to watch):

For more financial film trailers, check out the Margin Call movie trailer.

John Thaler's JAT Capital Buys More IMAX Corp (IMAX)

John Thaler's hedge fund JAT Capital just filed a 13G with the SEC regarding shares of IMAX Corp (IMAX). Per portfolio activity on August 22nd, JAT has disclosed a 4.6% ownership stake in IMAX with 2,979,280 shares.

Since the end of the second quarter in June, this marks a 349% increase in their position size as they've gobbled up shares. Since the end of June, shares of IMAX are down 48%.

Some managers have had somewhat of a '3D' pairs trade on by going long IMAX and short RealD (RLD), but we obviously can't see JAT's shorts.

Thaler's Background

Before he founded JAT, Thaler worked at Shumway Capital Partners (which returned capital this year). Chris Shumway himself invested in JAT's launch. Thaler covered technology, media and telecom and managed the internal Omni fund while at Shumway. Before that, he worked at Spectrum Equity Investors in private equity.

Due to his background, you'll see an emphasis on the TMT sectors in his portfolio. Thaler earned his BA in Economics from the University of Chicago. In 2008, JAT returned -5.9% and in 2009 returned 23.2% gross. This isn't the first time we've covered Thaler's fund as we've also detailed JAT's bet on social media via SINA.

Per Google Finance, IMAX is "is an entertainment technology companies, specializing in motion picture technologies and presentations. The Company’s principal business is the design and manufacture of digital theater systems (IMAX theater systems) and the sale or lease of IMAX theater systems."

Tuesday, August 30, 2011

Bill Ackman's Pershing Square Buys $600 Million of Investments During August Volatility

Bill Ackman's hedge fund Pershing Square Capital utilized the market volatility in early August as an opportunity to buy stocks, according to their recent letter to investors. So what did they buy?

Ackman writes,

"We have often described stock market volatility as an opportunity for Pershing Square. Since the beginning of the month, the market, and to an even greater extent, most of our holdings went on sale. We took advantage of this favorable pricing to invest more than $600 million in existing investments including Fortune Brands, Kraft, Family Dollar, Citigroup, and two new commitments. In each case, the businesses continue to make progress that meets or exceeds our expectations making our additional investments that much more compelling. Unfortunately, for most of our remaining holdings we were restricted in purchasing more by virtue of our insider status, or other regulatory or corporate charter provisions that limit our ability to increase our ownership percentage."

After writing the letter (dated August 17th), Pershing Square received permission to increase its ownership stake in J.C. Penney (JCP) to 26.1% of the company, up from the 18.2% they currently own as well.

Pershing's New Investments

Ackman did not disclose the names of his two new investments, most likely because they were/are still acquiring their position. His letter states that they should be able to share more details about one of the positions in the upcoming months.

It would make sense that he could reveal one of them at the upcoming Value Investing Congress where he will be presenting investment ideas along with many other hedge fund managers (Market Folly readers: today is the LAST day for substantial savings to the event, click here for the discount).

Ackman's investor letter drops a hint that they bought an investment that broadly falls into the category of their old General Growth Properties (GGP) investment: i.e. a situation where they were able to buy GGP for less than a dollar per share and enhanced the probability of recovery for shareholders with their active intervention. Let the guessing games begin.

In early August we detailed how Pershing Square bought more Fortune Brands (FO), but now we know they were buying more than one stock.

For more excerpts from Pershing Square's recent letter to investors, we've outlined why Ackman bought more Citigroup, as well as Pershing's hedging strategy in this crazy market.

Why Bill Ackman Bought More Citigroup (C)

In his recent letter to investors, Pershing Square founder Bill Ackman revealed he bought $600 million worth of investments during the recent market volatility. One stock that garnered such capital was Citigroup (C).

Ackman outlines why the stock has been selling off:

"In the second quarter, the share price of Citi and its peers declined primarily due to three concerns: (1) the requirement that systemically important financial institutions will need to hold additional capital (commonly referred to as the SIFI buffer), (2) concerns about exposure to potential losses resulting from the issues surrounding the troubled Eurozone sovereigns, and (3) worries about weakness in the U.S. economy."

In the brand new issue of our Hedge Fund Wisdom newsletter, we pointed out an interesting dichotomy between shares of two financial giants. While many funds like Paulson & Co and Appaloosa Management were selling shares of Bank of America (BAC) in the second quarter, numerous contrarians stepped up to buy Citigroup as shares tumbled.

Ackman was one of those contrarians, along with Lee Ainslie's Maverick Capital. We've also detailed how Curtis Macnguyen's Ivory Capital owns a sizable C stake. The Pershing Square manager goes on to outline his rationale for why C is a good investment:

"Citi recently provided disclosure about its exposure to the troubled Eurozone sovereigns and the corporations and consumers that are domiciled within those countries. Based on this disclosure, we believe that Citi is adequately capitalized to withstand the losses that may result from adverse outcomes from the Greek and other Eurozone debt crises. On July 15 th , Citi reported its second quarter results which highlighted the growth in its emerging markets franchise, the continued improvement in credit costs, and further strengthening of its capital ratios. At current share price levels, Citi trades at less than five times our estimate of normalized EPS before including any benefit for the present value of excess capital and tax assets, and less than three times normalized EPS after including these benefits."

We originally covered why Ackman bought Citigroup back in April 2010. At the time, they purchased shares at nearly 1.1x tangible book value. Ackman notes that now, "tangible book value has grown by nearly 20%, yet the Company's tangible book value multiple has declined to 0.6 times."

Overall, the hedge fund thinks the bank has enough liquidity to weather the current economic environment. Ackman believes that C will command a higher multiple once market uncertainty declines.

For more from Pershing Square, check out Ackman's purchase of $600 million worth of investments during August's volatility, as well as Ackman's hedging strategy.

Bill Ackman & Pershing Square's Hedging Strategy

While many of the hedge funds we track on Market Folly employ a long/short equity strategy, Bill Ackman's Pershing Square Capital takes a slightly different approach, typically preferring credit default swaps (CDS) to shorting equities.

In fact, Ackman's approach is more akin to Seth Klarman's approach at Baupost Group. Klarman typically hedges against outlier events such as hyperinflation. These hedges typically cost very little and often expire worthless, but if the outlier event does occur, they can payout over 50x.

In fact, we've detailed Ackman's strategy briefly before in our profile of Ackman & Pershing Square. Given the recent market volatility, Ackman took this opportunity to outline his hedging strategy in his recent letter to investors to remind them that they don't attempt to manage short-term volatility.

Ackman purchased $600 million worth of investments recently and so let's take a look at the other side of the coin: hedging. Ackman writes,

"Unlike as we did in the past, we don’t own investment grade CDS because we believe these credits are mispriced. Rather, we continue to own approximately $7 billion of index CDS which serves as a form of disaster protection, but one that is unlikely to pay off in a material way unless and until there is another major systemic crisis.

We own almost no single-name CDS other than to hedge a modest amount of uncollateralized exposure we have to financial institution counterparties. We have been unable to identify large single-name, standalone CDS investments since 2009. This is largely due to the rapid improvement in corporate creditworthiness over the last two years."

And then turning back to Ackman's tail-risk protection, he goes on to note that the hedge fund has committed capital to asymmetric payoffs that won't protect the fund unless there is a very large market decline. He writes,

"Since the inception of the funds, we also have purchased options which offer asymmetric payoffs in the event of the occurrence of low-probability catastrophic or otherwise unanticipated negative events. These events could include large movements in interest rates, currencies, or other asset prices that we believe may occur during periods of market stress."

As such, it sounds like Pershing will underperform in times of mild market stress (like recently) but is more-so hedged against extreme outlier events. According to their investor letter, Pershing was up 1.7% for the year at the end of the second quarter. However, HSBC Private Bank data says that Pershing is now -10.5% through mid-August.

For more from the hedge fund, head to our post on why Ackman bought more Citigroup.

Lone Pine Capital Nearly Doubles SolarWinds (SWI) Stake

Stephen Mandel's hedge fund Lone Pine Capital filed a 13G with the SEC regarding shares of SolarWinds (SWI). Due to portfolio activity on August 19th, Lone Pine now shows a 5.2% ownership stake in the company with 3,766,081 shares.

This is an increase in their position size of 97.5% as they've almost doubled their stake since the end of the second quarter on June 30th.

Mandel's hedge fund has been busy buying lately and we've detailed how Lone Pine likes information technology plays and their SWI purchase falls right under that theme.

Per Google Finance, SolarWinds "designs, develops, markets, sells and supports enterprise information technology (IT) infrastructure management software to IT professionals in organizations of all sizes. The Company’s offerings ranges from individual software tools to software products, which solve problems faced every day by IT professionals and help to enable management of networks and IT environments."