Alcon Agrees Novartis Deal in Consensus Hedge Fund Arbitrage Trade

Alcon (ACL) has reached an agreement to sell the remaining 23% of the company to Swiss drug maker, Novartis (NVS). Novartis is offering 2.8 shares of NVS for each share of ACL, the equivalent of $168 for each ACL share. The deal is supposed to close in the first half of 2011, pending shareholder approval.

While Novartis' offer comes in at $168 per share, ACL is currently trading just above $164. The deal is contingent upon shareholder approval and if you examine the list of shareholders, it's littered with prominent hedge funds. Back in the second quarter issue of our Hedge Fund Wisdom newsletter, we flagged Alcon (ACL) as a 'consensus buy' due to numerous hedge funds starting and accumulating positions in the company. You can check out a full free sample issue here.

Then in our new third quarter issue, we singled out Alcon as a featured hedge fund merger arbitrage play three weeks ago. To understand the hedge fund investment thesis, here's some of our commentary from our newsletter:

"Alcon was purchased by Nestle in 1977. Nestle floated to the public a 25% stake in the company in 2002. In April 2008, Novartis (NVS) purchased from Nestle a 25% stake in Alcon for $143 per share. And in August of 2010, Novartis exercised its call option to acquire Nestle’s remaining stake at a price of $181 per share.

In January 2010, Novartis made an offer of 2.8 shares of Novartis stock for each share of Alcon for the stake owned by the public (which currently values Alcon at $156 per share). Still, Alcon is trading at $163 because the offer has been rebuffed so far and investors are looking for a more equitable offer to the Nestle stake takeout that was done at $181. Arbitrageurs are betting that Novartis will increase the effective exchange ratio, so they buy Alcon and short Novartis in order to hedge out the risk that Novartis shares may go down by the time the deal closes.

Novartis closed its acquisition of Nestlé’s stake in 3Q, which increased investors’ confidence that a buyout of the public shares will happen sooner rather than later. In addition, Alcon’s share price is tied to the value implied by the exchange ratio offered by Novartis. So, as Novartis’ shares dropped in late 2Q / early 3Q, so did Alcon shares. At $135, the spread to the Nestle takeout at $181 was seen as too wide and the value of Alcon’s franchise was under-appreciated by the market.

This combination motivated some new funds to add Alcon to their portfolio. Magnetar Capital started a new position in Alcon and made it its top portfolio holding with a 12% weight. Steven Cohen’s SAC Capital maintained Alcon as its #1 position and increased its exposure during the quarter by 20%. John Paulson’s hedge fund Paulson & Co increased its exposure by 30%. Highbridge Capital doubled its position while Jamie Dinan’s York Capital and Thomas Steyer’s Farallon Capital also added shares of ACL. And while some funds are obviously short Novartis as part of the arbitrage pair (though they don’t disclose it), other funds have elected to purchase puts on Novartis to round out the merger-arb trade."

Given the quantity and quality of hedge funds involved in this trade, it will be very interesting to see if they approve the current deal valued at $168 per each ACL share or if they push for the same $181 per share that Novartis paid Nestle. With shares still trading slightly below the deal price, it will be interesting to follow.

The above is the type of research and analysis we cover in our Hedge Fund Wisdom newsletter. Be sure to click here for a free sample issue as we examine the investment theses behind hedge fund trades.

Goldman Sachs VIP List & Hedge Fund Trend Monitor: Stocks That Matter Most to Hedgies

Every quarter, Goldman Sachs releases a list of stocks predominantly owned by hedge funds. The aptly named Goldman Sachs VIP list (or 'Very Important Positions' list) aggregates positions held by hedge funds utilizing fundamental strategies. This is just one part of the data aggregation found in Goldman's quarterly Hedge Fund Trend Monitor and we'll detail the latest findings below.

These positions are derived from 13F filings that hedge funds file with the SEC and those of you with Bloomberg Terminals can find this compilation at: GSTHHVIP. First, some background performance of their VIP list. Goldman writes that the VIP list, "contains the 50 stocks that appear most frequently among the top 10 holdings of fundamentally-driven hedge fund portfolios. The basket of stocks that 'matter most' has outperformed the S&P 500 by 71 bp on a quarterly basis since 2001, with a Sharpe Ratio of 0.26. The VIP list underperformed the S&P 500 during 2Q 2010 by 268 bp (-14.1% vs. -11.4%). Since then VIP list has outperformed the S&P 500 by 247 bp (8.8% vs 6.3%)."

Last quarter, we posted up the previous iteration of the Goldman Sachs VIP list and for Q2 there are a few new additions to the list this time around including: Fidelity National Information (FIS), a stock many hedgies added after the company announced a leveraged recapitalization plan. Another new stock on the list, Comcast (CMCSA), has been a favorite of Columbia's University's value investing professor, Bruce Greenwald.

Two other stocks just added to the VIP list have been favorites of 'Tiger Cub' hedge funds as Andreas Halvorsen's Viking Global has a sizable position in Tyco International (TYC), and Stephen Mandel's Lone Pine Capital is bullish on Cognizant Tech Solutions (CTSH). Other stocks added to Goldman's VIP list in Q2 include: Barrick Gold (ABX), Viacom (VIA.B), Covidien (COV), Freeport McMoran (FCX), Covanta (CVA), Davita (DVA), Schlumberger (SLB), US Bancorp (USB), Halliburton (HAL) and General Electric (GE). These stocks previously did not have enough hedge fund ownership to make the cut, so it's apparent that hedgies were buying those names in Q2.

Without further ado, here are the top 10 stocks on the VIP list ranked by the number of hedge funds with the stock as a top 10 holding:

1. Apple (AAPL): 75 funds
2. JPMorgan Chase (JPM): 42
3. Pfizer (PFE): 36
4. Bank of America (BAC): 34
5. Microsoft (MSFT): 34
6. Citigroup (C): 32
7. Alcon (ACL): 30
8. Google (GOOG): 24
9. Exxon Mobil (XOM): 23
10. Mastercard (MA): 22

In our brand new quarterly newsletter, hedge fund wisdom, we highlighted that many hedgies had been adding Alcon (ACL) in Q2 and the stock consequently has now garnered a place in the top 10 of Goldman's VIP list. What's interesting is that 8 out of the 10 stocks above have seen negative returns year-to-date. Despite Apple's solid performance this year, the weakness in other top holdings could potentially be why so many hedgies are struggling. Mastercard (MA) recently hit a new 52-week low and many hedgies were buying at higher levels in Q2. This stock just broke into the top 10 of the VIP list this quarter.

On a sector basis, hedge funds had their highest weighting in consumer discretionary at 17% followed by information technology at 16%. One interesting find in Goldman's data is that stocks with the least hedge fund ownership have actually outperformed stocks with the highest hedge fund ownership concentration. This just ties into the notion of the hedge fund herd mentality that we've discussed before. Sometimes it's best to head in the opposite direction of the pack.

Embedded below is Goldman Sachs' Hedge Fund Trend Monitor report in its entirety for the second quarter. It includes the VIP list and much more:



You can download a .pdf copy here.

Keep in mind that you can receive complete portfolio updates on 20 of the top hedge funds in the industry via hedge fund wisdom by market folly, our brand new quarterly publication. Readers can receive a free sample issue here.

Matthew Grossman's Hedge Fund Plural Investments: Portfolio Glance (13F Filing)

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.)

This is the first we've covered Matthew Grossman's hedge fund so here's some background. Grossman founded Plural Investments in 2008 with $900 million after previously serving as the Chief Investment Officer of CR Intrinsic (of Steven Cohen's SAC Capital). Prior to that, Grossman was an energy analyst with Julian Robertson's Tiger Management. Needless to say, he has quite the resume when it comes to prominent fund managers.

Fourth quarter 2009 was actually the very first time that Plural filed a 13F with the SEC. So, we don't have any quarter over quarter portfolio changes to update you on. However, this is the first major glimpse at their portfolio and as such we'll provide their top holdings.

Top 20 Holdings by percentage of assets reported on 13F filing

1. Alcon (ACL) Calls: 7.64%
2. Grainger (GWW): 3.07%
3. Goldman Sachs (GS): 2.64%
4. SPDR Gold Trust (GLD): 2.33%
5. Eaton (ETN): 2.05%
6. Bucyrus (BUCY): 2.02%
7. US Oil Fund (USO): 1.95%
8. Goodyear Tire & Rubber (GT): 1.92%
9. Dr Pepper Snapple (DPS): 1.91%
10. Flowserve (FLS): 1.77%
11. Alcon (ACL): 1.75%
12. Humana (HUM): 1.67%
13. Wellpoint (WLP): 1.55%
14. Union Pacific (UNP): 1.37%
15. CSX (CSX): 1.28%
16. Watsco (WSO): 1.19%
17. Bank of New York Mellon (BK): 1.12%
18. Cablevision (CVC): 1.11%
19. Lincoln National (LNC): 1.10%
20. Norfolk Southern (NSC): 1.07%

So, an intriguing first look at Grossman's Plural Investments. Right away you can notice a few sector themes here. While they represent a smaller portion of his overall portfolio, railroads definitely catch the eye here. Grossman's hedge fund owns practically all the remaining majors left after Burlington Northern's acquisition by Warren Buffett's Berkshire Hathaway. Plural owns shares in CSX, UNP, and NSC. Also, we see that Grossman fancies healthcare here as he owns shares in both Wellpoint and Humana. By far and away their largest position though is Alcon as they own both calls and common stock on the name. Lastly, we'll make note of yet another hedge fund with exposure to gold (via GLD). Whether it be for hedging, a macro bet, or some other purpose though, we don't know. Overall, an interesting mix of stocks and we look forward to being able to compare portfolios next quarter.

Data used for this article comes from Alphaclone, our source for backtesting strategies and sorting through all the hedge fund portfolio maneuvers with ease. Assets reported on the 13F filing were $826 million this quarter. Remember that these filings are not representative of the hedge fund's entire base of AUM.

In our portfolio series we've already covered a ton of long/short equity hedge funds, including:
Value, Event-Driven or Activist focused funds such as: Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Warren Buffett's portfolio, David Tepper's Appaloosa Management, Dan Loeb's Third Point, Eddie Lampert's RBS Partners, Bill Ackman's Pershing Square Capital Management, Ricky Sandler's Eminence Capital.

'Tiger Cub' and 'Tiger Seeded' funds (hedgies somehow tied to Julian Robertson): Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, Lee Ainslie's Maverick Capital, David Ott's Viking Global, and Chris Shumway's hedge fund Shumway Capital Partners, Chase Coleman's Tiger Global, Roberto Mignone's Bridger Management, Philippe Laffont's Coatue Management Charles Anderson's Fox Point Capital, Jonathan Auerbach's Hound Partners, Lee Hobson's Highside Capital, David Stemerman's Conatus Capital, Matt Iorio's White Elm Capital, David Gallo's Valinor Management, Tom Brown's Second Curve Capital, and Robert Citrone's Discovery Capital.

As well as hedge funds employing various strategies ranging from long/short to merger arbitrage to global macro: John Paulson's hedge fund Paulson & Co, Philip Falcone's Harbinger Capital Partners, Thomas Steyer's Farallon Capital, John Burbank's Passport Capital, Brett Barakett's Tremblant Capital, George Soros' hedge fund Soros Fund Management, Phil Hempleman's Ardsley Partners.

Be sure to check back daily for our new updates.