Friday, June 7, 2013

What We're Reading ~ Hedge Fund Links 6/7/13

Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster [Dreyfuss]

A look at Karsch Capital's positioning [ValueWalk]

Managers warned on giving early investors too generous terms [COO Connect]

Introducing the new hedge fund: the family office [CNBC]

Significant impact on buyside portfolio returns due to post Dodd-Frank costs [HedgeWeek]

An interview with Jim Chanos [Alternet]

Interview with Gotham Capital's Joel Greenblatt [Outlook India]

Tiger Global raises stake in Eventbrite [Hedgeworld]

SAC Capital case tests a classic dilemma [NYTimes]

Hedge fund's wild side: the man who lost $8 billion [Salon]

Fewest hedge funds invest in gold since 2010 [Bloomberg]

Quant hedge funds hit by US bonds sell-off [FT]

A week in the life of a Wall Street intern [Dealbook]

A hedge fund for you and me? The best move is to take a pass [Washington Post]

How Mangrove built a successful hedge fund [Barrons]

Wednesday, June 5, 2013

What We're Reading ~ Analytical Links 6/5/13

The new R&D: Repurchases and dividends [Reformed Broker]

A macro update [Micro Fundy]

The long case on Altisource Portfolio Solutions (ASPS) [Seeking Alpha]

A look at Charter Communications (CHTR) [Brooklyn Investor]

Jeff Gundlach: short Chipotle and avoid everything Apple [Covestor]

Beware the hidden costs in tech [Barrons]

A bastardization of the process [Research Puzzle]

Buffett's Berkshire buys small Virginia newspaper [CNBC]

Harvard's Kaplan says to succeed know what you want [Bloomberg]

Mavericks lecture: Liberty Media's (LMCA) John Malone [Youtube]

The power of habit investments [Zen Habits]

Ben Graham's "foolproof method of systematic investment" [Greenbackd]

It's time for objectors of Bank of America's MBS deal to make their case [Reuters]

Prince Alwaleed and the curious case of Kingdom Holding Stock [Forbes]

An 18-minute plan for managing your day [Harvard Business Review]

On money and happiness [Harvard Gazette]

Lee Cooperman's Thesis on Covidien & Sirius XM Radio: Omega Advisors Q1 Letter

Lee Cooperman's hedge fund Omega Advisors' Overseas Partners returned 10.9% in the first quarter of 2013 and has seen annualized returns of 16.6% since inception.  We wanted to post an excerpt from Omega's Q1 letter highlighting Cooperman's thesis on Covidien (COV) and Sirius XM Radio (SIRI).

Covidien (COV): A Spin-Off Play

Cooperman likes Covidien because the company is spinning off a lower margin, lower growth business, Mallinckrodt (MNK).  He fancies the standalone COV business afterwards and writes about the spinoff:

"First, it will enable MNK to invest more appropriately in maximizing a number of underappreciated  opportunities in its pharma pipeline, while pruning assets with sub-optimal growth characteristics. Second, by  divesting itself of the lower margin and lower growth MNK businesses, stand-alone COV, which operates in  attractive medical device and supply segments with favorable competitive dynamics and end-market growth,  will drive margin expansion that should translate into a higher multiple in-line with its comparables. We further  expect COV to pursue actions, including cost reductions and capital deployment (noting the recently  announced $3-billion share-repurchase authorization on top of the $425m outstanding on its previous  authorization) to offset the transitory transaction-related tax and other dis-synergies from the spin, thus driving  upside to consensus pro forma estimates. We estimate new COV will generate EPS of $4.58 in FY14 and $5.13  in FY15, while MNK will generate $0.41 in FY14 and $0.48 in FY15, above pro-forma street estimates. Using  conservative target P/E multiples, our sum-of-the-parts valuation implies 25% upside over the next 12 months  against limited downside given the current discount multiple to peers, creating an attractive risk/reward in the  stock approaching the mid-year spin-off of MNK that is likely to act as a catalyst for the shares."

COV has been largely favored by 'vanilla' managers such as mutual funds and index funds.  Looking at the top holders, there weren't many hedge funds involved as of the end of Q1 but that could have changed since then due to the impending spin-off.

Omega's Thesis on Sirius XM (SIRI)

Cooperman's fund has held a SIRI position for a while, but continues to like the name because the company has a ton of subscribers and has negotiating leverage when acquiring exclusive content.  Omega has identified four growth drivers for Sirius XM:

"First, SIRI can be more proactive in  addressing the used-car market and converting people who have the hardware in the car into paying subscribers  at little to no cost. Second, a rising SAAR lends itself to higher additions from new-car sales. Third, current  estimates of almost 100-million cars with SIRI preinstalled by 2017 points to massive potential over the next  few years compared with the current installed base. And fourth, the price hike announced in 2011 and  implemented over the last year demonstrates significant pricing power embedded in this model. We believe  that the best way to value SIRI is on a free-cash-flow per share metric as the company has over $7 billion in  gross NOLs, is buying back shares aggressively, and at these levels the amount of NOL per share increases via  the buyback. Therefore, the more aggressive SIRI is, the longer the NOL lasts per the point where, in  our models, if the stock stays at $3.00 per share, it is possible to buy back the entire company before the NOL  runs out. We think downside is limited and see significant potential in the years ahead for SIRI, with a price  objective of $5 using a low-teen multiple of 2015 cash flow."

SIRI has been a favorite play among many hedge funds.  While Omega Advisors is one of the top institutional holders of SIRI, other hedge funds involved as of the end of Q1 include: Blue Ridge Capital, Coatue Management, Slate Path Capital, and Hound Partners.

Not to mention, John Malone's Liberty Media (LMCA) has amassed quite a sizable stake in SIRI

Omega Looking At Infrastructure Plays Too

Cooperman and his colleague Steve Einhorn point out in their Q1 letter that infrastructure-related investments should do well going forward and they've been searching for potential investments as they see a quest for energy independence and a manufacturing renaissance as catalysts.

For more from this hedge fund manager, we recently highlighted Omega's new position in PennyMac Financial Services and also flagged  Cooperman's market thoughts from the SALT Conference.  

Bill Ackman's Slideshow Presentation From Sohn Conference: A Rising Tide is a Good Gamble

Hat tip to ValueWalk for posting up Bill Ackman's slideshow presentation from the Sohn Conference, entitled: "A Rising Tide is a Good Gamble". 

We previously posted up notes from Ackman's presentation on Procter & Gamble from the event last month.  You can also see notes from all other speakers here.

Embedded below is Ackman's slideshow on PG:

In other activity from this hedge fund, we just detailed how Pershing Square plans to trim its Canadian Pacific stake.

Tuesday, June 4, 2013

Third Point Increases Asian Exposure (Via Sony): May Exposure Report

Dan Loeb's Third Point Offshore Fund just released its May exposure report.  In it, we see that Third Point was up 3.6% in May and is up 14.7% year-to-date.

Net Long Exposures

In terms of exposure in equities, Third Point was 70% long, -22.5% short, leaving them 47.5% net long equities at the end of May.  This is only a slight increase from April when they were 45.4% net long.

In credit, Third Point was 32.3% net long at the end of May.

Increased Asian Exposure

Geographically speaking, they're 60% net long the Americas region, 8% net long EMEA, and 15% net long Asia.

This marks a sizable difference in their net long positioning in Asia as they are now 15% net long, compared to only 6% net long the month prior. 

This is mostly attributable to their new Sony (SNE) long position.  Loeb is trying to engineer an activist campaign at the company and is pushing for Sony to spin off their entertainment group.  Though it should also be mentioned that Third Point slightly reduced short exposure in the region as well.

Embedded below is Third Point's May exposure report:

Third Point Revealing Less Information

Unfortunately, Third Point has made a change to their monthly exposure report, and they are no longer disclosing their top positions, top winners, or top losers for the month. 

As such, we'll have to rely solely on SEC filings, investor letters, and conference appearances going forward.  If you want to see what US stocks Third Point is investing in, head to our Hedge Fund Wisdom newsletter as we cover it there.

To see the April version of their exposure report that revealed much more portfolio information, head to our post here.   You can also view Third Point's Q1 letter.

Andreas Halvorsen's Viking Global Boosts Cemex Stake

Andreas Halvorsen's hedge fund firm Viking Global filed a 13G with the SEC on shares of Cemex (CX) recently.  Per the filing, Viking has revealed a 5.3% ownership stake in CX with 57,375,728 shares.

This marks a 29% increase in the amount of shares they own.  They owned just over 44.4 million Cemex shares at the end of the first quarter.  The latest SEC filing was required due to portfolio activity on May 21st.

In other portfolio activity from this hedge fund, we recently highlighted that Viking Global increased its Intuitive Surgical position.

Per Google Finance, Cemex is "a Mexico-based company principally engaged, through its subsidiaries, in the cement manufacturing. The Company produces, distributes and sells cement, clinker, ready-mix concrete, aggregates and related building materials in more than 50 countries worldwide. The Company’s main production facilities are located in Mexico, the United States, Spain, Egypt, Germany, Colombia, the Philippines, the Dominican Republic, the United Kingdom, Croatia, Panama, Latvia, Puerto Rico, Thailand, Costa Rica and Nicaragua."

For more on this manager, we posted up a rare interview with Andreas Halvorsen on investment process.

Odey Discloses Ocado Group Position: Hedge Fund Battleground Stock

Crispin Odey’s Odey Asset Management has disclosed a 5.04% holding in London listed Ocado Group (LON: OCDO).  Whilst it was known from their letters that Odey were long Ocado, the size of the stake was unknown until now. 

Fellow UK-based hedge fund Lansdowne Partners also hold a large portion of Ocado stock, with a 5.72% holding that they disclosed in November 2012.   

Ocado: Hedge Fund Battleground Stock

Ocado has been somewhat of a battlefield for large hedge funds.  While the UK funds listed above are long, numerous big US-based funds are short, including Jim Chanos' Kynikos Associates at -3.44% and John Griffin's Blue Ridge Capital at -1.17%.   

The longs have had the best of it in recent months.  A short covering rally since December has seen     the net short position in Ocado shares decline from 17% to 11% and the stock rise by over 3 times from 80p to 260p.   

Late last year, we highlighted hedge fund short positions in the UK for those interested.

About Ocado Group

Per Google Finance – “Ocado Group plc is a United Kingdom-based holding company. The Company is an online grocery retailer. The principal activity of the Company, along with its subsidiaries, is retailing and distribution of grocery and consumer goods within the United Kingdom. The Company owns Ocado Holdings Limited, which holds the entire interest in Ocado Limited. The principal activity of Ocado Limited includes retailing and distribution of grocery and consumer goods. On February 9, 2010, the Company acquired Ocado Limited. The Company's wholly owned subsidiaries include Ocado Holdings Limited, which is an holding company; Ocado Limited, which is engaged in retail and distribution; Ocado Information Technology Limited, which is engaged in intellectual property, and Ocado Cell in Atlas Insurance PCC Limited, which is an insurance company. Ocado Holdings Limited is a 100%-owned subsidiary of Ocado Group plc.”

Bill Ackman's Pershing Square to Trim Canadian Pacific (CP) Stake

Bill Ackman's hedge fund firm Pershing Square Capital Management filed an amended 13D with the SEC regarding their activist position in Canadian Pacific (CP).  Per the filing, Pershing has reported a 13.8% ownership stake in CP with 24,159,888 shares.  They also included a press release that indicated they plan to sell up to 7 million shares of CP.

Here's the full press release below:

"NEW YORK, June 3, 2013 — Pershing Square Capital Management, L.P. announced today that it plans to sell up to seven million common shares of Canadian Pacific Railway Limited (TSX: CP; NYSE: CP). Pershing Square plans to limit these sales to unsolicited brokers’ transactions on the NYSE and the TSX in amounts that will not exceed 10% of the combined NYSE and TSX volume for the CP common shares on any day of trading. The sales will begin on or after June 10, 2013 and will likely be completed over the next six to twelve months.

Pershing Square CEO Bill Ackman said: “Thanks to Hunter Harrison’s and the CP team’s performance over the last nearly one year, Canadian Pacific’s share price has more than tripled since we first invested in CP. As a result, our stake in CP has grown to approximately 26% of the combined assets of our funds. Given that increased concentration, portfolio management considerations have driven our decision to trim our holdings. Even after these sales, we expect to remain CP’s largest shareholder and for CP to remain one of our largest investments.”

Pershing Square’s representatives, Bill Ackman and Paul Hilal, will continue to serve on the company’s board of directors. They were elected to the board in May 2012 after successfully nominating a slate of directors as part of a proxy contest. Shortly thereafter, the company appointed rail industry veteran Hunter Harrison as its CEO.

“We can’t overstate our appreciation for Canadian Pacific’s employees and the important contributions of our fellow board members,” said Paul Hilal.

Under Canadian rules, Pershing Square will make filings within three days following sale transactions, disclosing the price and number of shares sold.

Pershing Square reserves the right to change the plans described above at any time, but if it changes these plans it intends to promptly announce the change.

This press release does not constitute an offer to sell or the solicitation of an offer to buy CP common shares."

CP has been a big winner for Pershing as shares have rallied over 137% from the time Pershing initially disclosed their stake.  We highlighted Pershing's CP activist position in October 2011.

Bruce Berkowitz's Fairholme Discloses $2.4 billion Par Value Stake in Fannie Mae & Freddie Mac Preferred

On Sunday, Bruce Berkowitz's firm Fairholme Capital released a statement indicating that they own $2.4 billion par value of Fannie Mae and Freddie Mac Preferred stock.

This isn't the first time we've seen a prominent investor involved in this type of play.  Back in 2011, Richard Perry of Perry Capital gave a presentation on going long GSE Junior Preferred securities.

Here's the full statement from Fairholme:



June 2, 2013


Fairholme Capital Management announced that its clients, including mutual fund shareholders of The Fairholme  Fund (NASDAQ: FAIRX) and The Fairholme Allocation Fund (NASDAQ: FAAFX), own approximately $2.4  billion par value of Fannie Mae and Freddie Mac Preferred Stock and are ready to help with a restructuring that  accelerates the return of meaningful investment to the secondary mortgage market.

Privately-owned Fannie Mae and Freddie Mac are critical to our nation’s economic security, lowering the cost and  increasing the availability of homeownership.

There are no substitutes. Fannie and Freddie currently purchase or insure 6 out of every 10 home mortgages in  America. Today, they are stronger than ever – enabling the United States Treasury to rapidly recoup its temporary  emergency investments in both entities.

Taxpayer dollars expended by the government during a time of national crisis will be fully repaid. And equitable  treatment of taxpaying shareholders, including community banks, insurance companies, and mutual funds holding  Preferred Stock, must be restored with dividends reinstated. Repaying taxpayer investments, restructuring  government guarantees, and restoring shareholder property are not mutually exclusive. This is the American way.

The time to restructure Fannie and Freddie is upon us. Sustaining our nation’s economic recovery requires it.

On behalf of the hundreds of thousands of Fairholme Funds shareholders who helped to rebuild American  International Group, Bank of America, CIT Group, General Growth Properties, MBIA Inc., and others after the  Great Recession – we stand ready to do our part."

On an absolute dollar basis, this would mean that the combined preferred position would be Fairholme's second largest holding, only behind AIG (AIG), if these preferreds were trading at par value (they're not).  As noted in our Hedge Fund Wisdom newsletter two weeks ago, Bank of America (BAC) is Fairholme's second largest stake at just over $1.2 billion.

And embedded below is the press release PDF document:

You can download the .pdf here.

Fairholme has been active recently and we also highlighted when Berkowitz reduced his MBIA stake.

Notes From Virginia Investment Symposium 2013: Julian Robertson, Paul Tudor Jones & John Griffin

The University of Virginia's McIntire School of Commerce recently held its 2013 Spring Symposium entitled "Investing in Markets, Society, and Ourselves: Views from Investment Masters."  The panelists included hedge fund legends Julian Robertson of Tiger Management, Paul Tudor Jones of Tudor Investment Corp and John Griffin of Blue Ridge Capital.

Market Folly obtained access to a recording of the event through a Freedom of Information Act request and we wanted to highlight some brief notes and pearls of wisdom from these great investors.

Notes From UVa's Spring Investment Symposium 2013

Julian Robertson (Tiger Management)

On starting his fund:  He founded the firm with $8 million and at its peak managed $22 billion.  He noted how there wasn't as much short selling going on when he started.  He also said shorting is much harder today and back then you essentially had interest rate arbitrage on your shorts because interest rates were so much higher than dividends.  

Julian says he learned from Bob Wilson, who he labeled as one of the first hedge fund managers out there.

On traits he looked for in making hires at Tiger:  "We found out subsequently some real personality traits: competitiveness is right up there with brains and honesty."

As our Hedge Fund Wisdom newsletter drew attention to, Robertson recently sold out of Apple (AAPL) and he mentioned that at the event.  He says it's because he went back and re-read the book on Steve Jobs and realized his importance to the company as an innovator.

On the other hand, Robertson continues to like Google (GOOG) and thinks it's a great company.  He joked he can't wait to get some Google Glasses.  He also mentioned he still owns Daiwa Securities (TYO:8601) and has for a long time.

He says he feels you have to be playing Japan now given the policies there and notes that someone he knows is starting an all-Japan hedge fund.

Robertson called the hedge fund business 'a lifesaver' after losing his wife as he's been re-energized seeding managers and looking at businesses/investment ideas.

Paul Tudor Jones (Tudor Investment Corp)

He emphasized his focus on technical analysis as that's the method he learned for trading commodities originally.  He said, "I have one strong rule and that is when it comes to a stock if it's above the 200 day moving average, I'm gonna be long it, and if it's below it, I'm either not gonna own it or I'm gonna be short it, period end of story and I just let that govern every single thing that I do."

On crashes/financial crises:

"The crash of 1987 was a 100% derivatives inspired event.  So someone from my background, that came from trading futures, it was very easy for me to see what was about to transpire, because I understood that at that point in time, the tail was going to wag the dog.  If you look at the biggest financial crises of the past three decades, generally speaking they've been derivatives inspired.  Because that's the easiest way to bring knowingly and unknowingly a huge amount of leverage into any kind of particular instrument and it's the leverage that brings the volatility."

On Japan: Jones says to watch late next year for verification if Japan has been able to reduce their debt-to-GDP.   He said, "If it doesn't work, and all of a sudden they have a debt crisis, I would think you could just take 35% off all equity markets, including this one, by the time that one unwinds."

He also thinks Europe is pretty interesting with all the central bank action over there.

On when he might retire: He originally planned to potentially retire when his last child graduated from college, but he really enjoys the business and sees it as the biggest game in the world.  He wants to hang around to see how the Japan situation plays out. He said, "I think the next few years are gonna be, I think some of the most exciting times for macro in the last couple of decades."

On long/short strategies:  "When I think of long/short business, to me there's 5 ways to make money: 2 of those are you either play mean reversion, which is what a lot of long/short strategies do, or you can play momentum/trend, and that's typically what I do.  We've seen cheap companies get cheaper many, many times.  If something's going down, I want to be short it, and if something's going up, I want to be long it.  The sweet spot is when you find something with a compelling valuation that is also just beginning to move up.  That's every investor's dream."

Tudor Jones also noted that it's hard for a macro trader to not be perpetually long the US dollar against the South African Rand.

On short selling:  "I spent 20 years doing it, it's not the right way to make a living trading.  It's simply not.  And I've done really well on the short side.  There's nothing more exciting than a bear market.  But it's not a wonderful way for long-term health and happiness."

John Griffin (Blue Ridge Capital)

Griffin moderated the panel, though he also added some anecdotes of his own.

On Tiger's hiring practices: "Julian was always willing to take a risk on people who knew nothing if he felt they had characteristics of integrity, competitiveness, smart, and would be interested in the business.  And I think in someways that was a breakthrough back then."

Griffin impersonating Robertson after he initially met Andreas Halvorsen (who worked at Tiger and eventually founded Viking Global):  "Well, I mean, he may be one of the smartest people I've ever met, that's number one.  Number two, he's one of the most aggressive person I've ever met."

Griffin cited mentoring and having the open office layout at Tiger as some of the biggest reason for its success and the success of people who left to start their own funds.

Adding on to Jones' comments about Europe, Griffin said that if Draghi follows actions of other banks then "Europe stocks would fly because they're half the valuations."

Griffin also basically confirmed what everyone largely knew already: that Tiger alums often talk and share ideas.  He said Julian would call him and ask him for his favorite short idea then joked that after he told him the idea Julian would take off before Griffin could get Julian's best idea.

On investing: "In stock investing, the way I do it, because I'm not an activist, you're completely helpless.  You buy the stock, and if you don't like what the company's doing, you can sell the stock ... In investing, the only way to be really good at it, you have to accept the fact that everything is greater than yourself.  If it ever becomes anything to do with your action, unless you're an activist, you're smoked.  You're a taker.  The markets are like the ocean... you can't be in a boat and say 'bring it on' to the ocean."  

Investment Pitches

Two current students and one former student pitched investment ideas to the panel:

1. Long ADT (ADT): They highlight ADT's position as the market leader in a fragmented industry and cited their dealer network as compelling.  The main part of the thesis centers around the company's new Pulse product where people can turn off lights and control other household functions in addition to home security from their smartphones.

While the street is seeing 30% adoption rate of this system, dealers they spoke to are seeing 80% installation rates.  They think concerns from competition from cable companies like Verizon (VZ) and AT&T (T) is overblown as they've tried to enter the business in the past and haven't been as successful.

2. Short Canon (CAJ): Melting ice cube short as the company faces lower unit sales & average selling prices, as well as increased competition.  They think that smartphones are replacing 'point and shoot' cameras and that mirrorless cameras will be favored over DSLR cameras.

They also cite the company's weak printer market and think the conservative management team is a drag on the stock.  Julian Robertson said he thinks it's a very good idea.

3.  Short Truworths:  Additionally, a former UVa student and former analyst at John Griffin's Blue Ridge Capital, Hoda Alibair, came up and presented a negative view on South Africa's lenient consumer credit policies.

She highlighted that 66% of the GDP is from household expenditure and there's been a significant growth in unsecured lending and 76% of households are running at a 76% household debt to income ratio.  So what's the best way to play this?

She noted how the tendency would be to short the banks exposed to this (and we highlighted how Conatus Capital's David Stemerman said to short African Bank at the Ira Sohn Investment Conference).

She instead looked for other plays on this in the consumer sector and she laid out the case to short TruWorks.  She says the company has peak margins that just aren't sustainable.  Zara, a big retail competitor, is just now moving in to the country as well.  Over 60% of Truworths' growth came from a brand called Identity, and these consumers are truly low-income consumers.