Corsair Capital Management's Letter: Q4 2010

Jay Petschek's Corsair Capital Management is out with its fourth quarter letter. In it, we see that Corsair finished 2010 up 15.4% which ironically is the exact same number as their compound net annual return since inception.

Highlighting their overall market view, Petschek writes, "as we believe post-recession equity markets are generally driven by the direction of earnings, which in turn is driven by economic growth, the markets seem to have room to move higher."

Portfolio Positions

Corsair singles out their position in LyondellBasell (LYB) in the letter as they believe the stock still trades at a discount to its peers. You'll recall that Dan Loeb's Third Point owns LYB in size as well. The company announced a dividend policy and plans to optimize its capital structure.

Petschek also highlights their stake in CapitalSource (CSE) as the company continues its transition from an over-leveraged REIT into a bank. Corsair believes shares are still undervalued and likes the company's debt repurchases and share repurchase plan.

Their letter also focuses on their position in Aon (AON). The hedge fund notes that the integration of Hewitt will create shareholder value and further entrench the company's dominant position in human capital solutions. We penned an in-depth analysis of AON in our last issue of our Hedge Fund Wisdom newsletter as many hedge funds had accumulated shares in past quarters. Click here for a free sample issue.

Corsair Capital Management's full letter and their investment write-up on Neo Material Technologies (NEM) is embedded below:



You can download a .pdf copy here

If you missed them, we've posted up a plethora of hedge fund letters recently, including:

- Maverick Capital's letter
- John Paulson's year-end letter
- Dan Loeb & Third Point's Q4 letter
- JANA Partners' letter
- Greenlight Capital's commentary
- Summary of Perry Capital's letter
- Xerion Fund's 2011 strategy
- Summary of Kleinheinz Capital's letter

Jay Petschek & Hedge Fund Corsair Capital Bullish on Expedia (EXPE) & W.R. Berkley (WRB) ~ Investor Letter

Today we're detailing the first quarter investor letter out of Jay Petschek (pictured) and Steven Major's hedge fund Corsair Capital Management. For the first quarter, they were up 6.7% net of fees. So, why should you care what Corsair has to say? Well, how about the fact that they've returned 15.5% annualized since inception in 1991 and have seen a total return of 1509%, absolutely demolishing the S&P 500 over the same timeframe. In January, we covered their previous investor letter and below we'll detail their latest thoughts.

First off, we see that their five largest positions are in Global Specialty Metals (GSM), Innophos Holdings (IPHS), Kapstone Paper & Packaging (KS), Lyondell bank debt, and Maiden Holdings (MHLD). In the first quarter of 2010, they also started some brand new positions including Expedia (EXPE), W.R. Berkley (WRB) and Live Nation (LYV). Stephen Mandel's hedge fund Lone Pine also started a LYV position recently.

Corsair's stake in EXPE is interesting as we've previously seen many hedge funds hold shares of Expedia's rival Priceline.com (PCLN) ~ it was a favorite stock among many Tiger Cub hedge funds. We even saw one fund add shares of Orbitz (OWW), another competitor in the online travel space. However, the only fund we've seen with a sizable position in Expedia is Roberto Mignone's Bridger Management. It's intriguing that more funds are starting to look into this space and this name in particular. Corsair's thesis in Expedia revolves around flat to rising ADRs and continued strong transaction growth. The company has a 10% free cash flow yield and they highlight a good point that EXPE definitely holds an asset in TripAdvisor. Online travel sites are gaining a hedge fund following certainly.

Additionally, we see that Capitalsource (CSE) was Corsair's largest winner in the first quarter. We make note of this because many prominent hedge funds hold a stake in CSE, including Seth Klarman's Baupost Group and Mohnish Pabrai as well. Lastly, Petscheck's hedge fund is bullish on shares of W.R. Berkley (WRB) as they think the property & casualty insurance company is only trading at an 'average' price, despite being one of the better names out there. Corsair notes that, "the P&C sector is trading at its cheapest valuation in at least a decade because we are at the weak point in the cycle." They've written an entire page summarizing their bullish stance on WRB at the end of their letter so we will defer to that for their thoughts.

Embedded below is the first quarter letter from Jay Petscheck's hedge fund Corsair Capital Management:



You can directly download a .pdf here.

We found their update an insightful read just like their previous letter as well so hopefully you enjoyed it. We'll continue to track Corsair as they are an ideal long/short equity fund to follow. We're starting to receive first quarter commentaries from hedge funds, so make sure to catch up on all the other hedge fund letters we've started to post.

Seth Klarman's Baupost Group Discloses New Positions (13F Filing Q4 2009)

This is the fourth quarter 2009 edition of our hedge fund portfolio tracking series. Before beginning, check out our series preface on hedge fund 13F filings.

Fittingly, we'll begin our coverage of fourth quarter holdings with arguably the most successful and respected modern hedge fund manager, Seth Klarman and Baupost Group. Klarman received his MBA from Harvard Business School and went to work for Baupost when he was 25. The rest is history as he has been one of the most successful investors of our time in terms of performance. Prior to this portfolio update, we had already covered Baupost's sale of RHI Entertainment (RHIE) and reduction in their Syneron Medical position (ELOS).

The positions listed below were Baupost's long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. Note that we are only covering the major portfolio maneuvers and all holdings are common stock unless otherwise denoted.


New Positions (Brand new stakes they initiated last quarter):
CIT Group (CIT)
DirecTV (DTV)
Liberty Media (LSTZA)


Increased Positions (Positions they already owned but added shares to):
Enzon Pharmaceuticals (ENZN): Increased by 290% ~ we covered the addition of this position before
Viasat (VSAT): Increased by 61.4%
Capitalsource (CSE): Increased by 15.4%
Theravance (THRX): Increased by 11.8%


Reduced Positions (Stakes they still own but sold shares in):
Sapphire Industrials (FYR.UN): Reduced by 63.7%
Syneron Medical (ELOS): Reduced by 28.4%
Domtar (UFS): Reduced by 10.3%
Capitalsource (SDCV 4% 7/1 Notes): Reduced by 2.9%
News Corp (NWSA): Reduced by 0.6%


Removed Positions (Positions they sold out of completely):
BPW Acquisition Corp (BPW)
Enterprise Acquisition Corp (EST)
Global Consumer Acquisition (GHC)
Liberty Media (LMDIA)
Prospect Acquisition Corp (PAX.UN)
RHI Entertainment (RHIE) ~ we detailed this right after it happened
SP Acquisition (inactive)
TM Entertainment & Media
Tremisis Energy (TGY.UN)
Overture Acquisition (NLX)


Top 15 Holdings by percentage of assets reported on 13F filing

1. News Corp (NWSA): 21.1%
   
2. Domtar (UFS): 10.1%
   
3. Viasat (VSAT): 9.86%
   
4. Capitalsource (Convertibles 4% 7/1): 9.7%
   
5. Theravance (THRX): 8.33%
   
6. Breitburn Energy Partners (BBEP): 5.68%
   
7. Enzon Pharmaceuticals (ENZN): 5.37%
8. Capitalsource (CSE):5.08%
9. CIT Group (CIT): 4.5%
10. Facet Biotech (FACT): 3.88%
    
11. DirecTV (DTV): 3.4%
    
12. Capitalsource (Note 7.25% 7/1): 2.75%
    
13. Alliance One (AOI): 2.71%
    
14. Theravance (Note 3.0% 1/1): 2.06%
    
15. Ituran Location & Control (ITRN): 1.39%
    

The main thing to takeaway from this filing is that this is only a small portion of Baupost's overall portfolio. They are currently in many distressed and more illiquid plays and we can't see them since they aren't required to disclose them publicly. Overall, the holdings listed above represent just over $1.5 billion in investments while Baupost manages a much larger asset base and also typically keeps a high amount of cash handy. Please note that in past Baupost updates we had combined all their Capitalsource exposure into one aggregate figure. This time we've instead separated it out by asset class as they own equity, notes, and convertibles.

Baupost's new equity acquisitions include CIT Group (CIT), DirecTV (DTV), and Liberty Media (LSTZA). Keep in mind though, that their stakes in DTV and LSTZA were actually a result of a Liberty Media transaction as Baupost owned the prior entity. Not to mention, while they show a new position in CIT Group, it was most likely a result of a debt to equity conversion, but there's no way to tell for sure. Additionally, they added to existing positions in Viasat and Enzon Pharmaceuticals. They sold completely out of a plethora of acquisition companies and notably reduced their stake in Sapphire Industrials. That really wraps up the majority of their activity.

In terms of other recent movements, we previously learned they will be buying more Facet Biotech (FACT) and rejecting Biogen Idec's takeover offer. For past resources on Klarman and Baupost Group, check out Klarman's interview from the annual Graham & Dodd breakfast, as well as some of his past investment insight,

Baupost is one of the select few funds we have included in our Market Folly hedge fund portfolio replicator that has backtested 25% annualized returns. Head over to Alphaclone to see the hedge fund portfolio replication in action.

Assets from the holdings reported in the SEC 13F filing were $1.58 billion this quarter compared to $1.35 billion last quarter. Please keep in mind that when we reference percentage of portfolio, we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), these percentages are undoubtedly different than in their actual hedge fund.

This is just one of the 40+ prominent funds that we'll be covering in our fourth quarter 2009 hedge fund portfolio tracking series, so check back daily.

Corsair Capital Management Investor Letter

Today we present you Corsair Capital Management's investor letter as part of our wisdom Wednesday series of documents and resources. Since inception in 1991, they've seen an annualized return of 15.4% and a total return of 1409%, very impressive numbers. Below you'll find the latest investor letter from Jay Petschek and Steven Major. They present their market outlook, summary of how their positions have fared, as well as the investment case for KAR Auction Services (KAR).

Embedded below is Corsair Capital Management's fourth quarter 2009 investor letter:




You can also download the .pdf here.

Head to our posts on recent investment partnership and hedge fund letters for more insight and investment ideas.

We're continuing our theme of 'wisdom Wednesday' here at Market Folly where we've been posting up insightful letters, research and resources from various sources. We've already posted up Bill Gates' 2010 annual letter, as well as Bill Gross' February investment outlook out of PIMCO, and Bank of America Merrill Lynch's hedge fund trend monitor report.

Hedge Fund Farallon Capital: Portfolio Update (13F Filing)

This is the third quarter 2009 edition of our hedge fund portfolio tracking series. If you're unfamiliar with tracking hedge fund movements or SEC filings, check out our series preface on hedge fund 13F filings.

Next up in our series is Thomas Steyer's hedge fund firm Farallon Capital. Thomas Steyer founded Farallon in 1986 and today it is a multi-billion dollar hedge fund that typically uses risk arbitrage strategies and invests in equities, private investments, debt, and real estate. Previously, he was an analyst for Morgan Stanley in their Mergers & Acquisitions department and also an associate on Goldman Sachs' risk arbitrage desk. Steyer graduated Summa Cum Laude from Yale University and also received his MBA from Stanford's Graduate School of Business. In the past, Farallon was ranked third in Alpha's 2008 hedge fund rankings. In terms of recent portfolio adjustments from Farallon, we saw they were just adding to their Beacon Roofing (BECN) stake. For more recent activity out of Farallon head to our post on their portfolio and internal firm adjustments.

Keep in mind that the positions listed below were Farallon's long equity, note, and options holdings as of September 30th, 2009 as filed with the SEC. We don't cover every single portfolio maneuver, as we instead focus on all the big moves. All holdings are common stock unless otherwise denoted.


Some New Positions
Brand new positions that they initiated last quarter:
Aetna (AET) Calls
Yingli Energy Bond
Focus Media (FMCN)
Jones Lang Lasalle (JLL)
Capitalsource Bonds
Express Scripts (ESRX)
Monsanto (MON)
Crown Castle (CCI)
BMC Software (BMC)
Rockwell Collins (COL)
JB Hunt Transport (JBHT)
Eastman Kodak Bond
SBA Communications (SBAC)
Marvel Entertainment (MVL)
Beacon Roofing (BECN) ~ They've since updated their stake
Charles Schwab (SCHW)
Google (GOOG)
Old Dominion Freight (ODFL)
Linktone (LTON)
Hurray Holding (HRAY)
China Housing & Land Development (CHLN)


Some Increased Positions
Positions they already owned but added shares to:
Visa (V): Increased position by 144.4%
Sirius Satellite Note: Increased by 85.4%
Carrizo Oil & Gas Bond: Increased by 63%
Mastercard (MA): Increased by 42%
Apollo Group (APOL): Increased by 38.1%
MSCI (MXB): Increased by 22.3%


Some Reduced Positions
Stakes they sold shares in but still own:
AmericaMovil (AMX): Reduced position by 54.2%
Priceline (PCLN): Reduced by 52%
Capitalsource (CSE): Reduced by 37.8% ~ we covered these sales as they happened
Kendle International Bond: Reduced by 19.6%


Removed Positions
Positions they sold out of completely:
Lucent Technologies (convertibles)
Financial Select Sector ETF (XLF) Puts
Qualcomm (QCOM)
Moody's (MCO)
Fidelity National Information (FIS)
Metavante Tech (MV)
Arch Capital Group (ACGL)
Amdocs (DOX)
Conway (CNW)
Solutia (SOA)
Sherwin Williams (SHW)
CTC Media (CTCM)
Pinnacle Entertainment (PNK)


Top 15 Holdings by percentage of assets reported on 13F filing

1. Aetna (AET) Calls: 9.38%
2. Visa (V): 9.24%
3. Capitalsource (CSE): 5.41%
4. MSCI (MXB): 4.37%
5. Apollo Group (APOL): 3.78%
6. Burlington Northern Santa Fe (BNI): 3.62%
7. Discovery Communications (DISCA): 3.49%
8. Yingli Energy Bond: 3.36%
9. iShares Russell 2000 (IWM) Puts: 3.11%
10. Focus Media (FMCN): 3.1%
11. Oracle (ORCL): 2.81%
12. Knology (KNOL): 2.58%
13. Jones Lang Lasalle (JLL): 2.51%
14. Sirius Satellite Note: 2.44%
15. Transdigm (TDG): 2.43%
    

The main talking point in Farallon's quarter over quarter changes was their brand new stake in Aetna (AET) calls. They ratcheted this up to over 9% of their reported 13F assets as the position was worth $139 million at the end of the third quarter. Other brand new positions in their top ten holdings include Yingli Green Energy bonds and shares of Focus Media (FMCN).

While their stake in Visa (V) is not a new position, they did double down and then some. This is easily one of the most popular hedge fund holdings we've seen in the select funds we track. Meaningful positions they no longer own include Lucent Technologies convertibles (previously a 4.8% stake), Qualcomm (QCOM - previously a 3.5% holding), and puts on the financial sector (XLF). They also completely sold out of Moody's (MCO) which is interesting seeing how Warren Buffett has been selling as well. Overall, Steyer's hedge fund firm increased their holdings in the services sector and reduced their holdings in financials and technology.

Assets from the collective holdings reported to the SEC via 13F filing were $1.4 billion this quarter compared to $1 billion last quarter. They were mainly out adding to positions across the portfolio. As a multi-billion dollar hedge fund, Farallon obviously has positions in other markets as well since their long US equities book is only comprised of a little over $1 billion. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Also, please again note that these positions were as of September 30th so two months have elapsed and they've undoubtedly shifted around their portfolio since then.

This is just one of the 40+ prominent funds that we'll be covering in our Q3 2009 hedge fund portfolio series. We've already covered Seth Klarman's Baupost Group Bill Ackman's Pershing Square, Stephen Mandel's Lone Pine Capital, Dan Loeb's Third Point LLC, David Einhorn's Greenlight Capital, John Paulson's firm Paulson & Co, Lee Ainslie's Maverick Capital, Andreas Halvorsen's Viking Global, Chase Coleman's Tiger Global, Brett Barakett's Tremblant Capital, John Griffin's Blue Ridge Capital and Shumway Capital Partners (Chris Shumway). Check back daily as we'll be covering new hedge fund portfolios.

Seth Klarman's Baupost Group Sells Capitalsource Shares (CSE)

This is the third quarter 2009 edition of our hedge fund portfolio tracking series. If you're unfamiliar with tracking hedge fund movements or SEC filings, check out our series preface on hedge fund 13F filings.

We're baaaack. We're kicking off our Q3 2009 portfolio tracking with the hedge fund that was most requested by readers: Seth Klarman's Baupost Group. This should come as no surprise given Baupost's amazing 20% annual compounded return. While Warren Buffett is often singled out as the greatest investor out there, one other man could very well be mentioned in the same sentence. We're talking of course about Seth Klarman. 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.

Klarman received his MBA from Harvard and then went on to work for Baupost at age 25. Nowadays, it's his show to run. Baupost is one of the select few funds we have included in our Market Folly custom portfolio that is seeing over 26% 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 as our portfolio is about to be re-balanced with new holdings).

Keep in mind that the positions listed below were Baupost's long equity, note, and options holdings as of September 30th, 2009 as filed with the SEC. We don't cover every single minor portfolio maneuver, as we instead focus on all the big moves. All holdings are common stock unless otherwise denoted.


Some New Positions (Brand new positions that they initiated last quarter):
Enzon Pharmaceuticals (ENZN)


Some Increased Positions (Positions they already owned but added shares to)
Viasat (VSAT): Increased position by 148%


Some Reduced Positions (Some positions they sold shares in)
Capitalsource (CSE): Reduced position by 41%
Syneron (ELOS): Reduced position by 32%
Facet Biotech (FACT): Reduced position by 20%
Audiovox (VOXX): Reduced position by 6%


Flat Positions (Holdings with no change in position size)
Alliance One (AOI), Breitburn Energy (BBEP), various Capitalsource notes, Domtar (UFS), Ituran Location and Control (ITRN), Liberty Media (LMDIA), Multimedia Games (MGAM), News Corp (NWS-A), Theravance Notes, Theravance (THRX), and RHI Entertainment (RHIE).


Removed Positions (Positions they sold out of completely)
GHL Acquisition
iStar Financial (SFI)
Horizon Lines (HRZ)
KBL Healthcare (inactive)
News Corp (NWS)
PDL Biopharma (PDLI)


Top 15 Holdings by percentage of assets reported on 13F filing

1. News Corp (NWS-A): 21.68%
2. Capitalsource (CSE - including positions in common stock and various notes): 19.53%
3. Theravance (THRX - including positions in common stock and notes): 12.34%
4. Liberty Media (LMDIA): 9.68%
5. Breitburn Energy Partners (BBEP): 7.12%
6. Viasat (VSAT): 5.97%
7. Facet Biotech (FACT): 4.47%
8. Domtar (UFS): 2.97%
9. Alliance One (AOI): 2.91%
10. Syneron (ELOS): 1.76%
11. Ituran Location and Control (ITRN): 1.31%
12. Enzon Pharmaceutical (ENZN): 1.26%
13. RHI Entertainment (RHIE): 1.13%
14. Multimedia Games (MGAM): 0.98%
15. Audiovox (VOXX): 0.90%
    

Many of Baupost's moves detailed in their 13F filing we've already covered here on Market Folly. This just goes to show why it's prudent to track the full spectrum of SEC filings. We already knew that Baupost had sold out of Horizon Lines (HRZ) and had been selling shares of Facet Biotech (FACT). Not to mention, we already covered the fact that Baupost sold out of PDL Biopharma (PDLI). The only new addition to Baupost's portfolio was Enzon Pharmaceuticals, and we had already disclosed this addition earlier on the blog as well.

So, there's really not a whole lot of new information revealed in their 13F filing apart from two changes. The first major change we see was that Klarman sold 41% of his common stock in Capitalsource (CSE). We saw Thomas Steyer's hedge fund Farallon Capital also sell some CSE common as well recently. While Baupost trimmed their stake there, the rest of their position in Capitalsource via various notes remained unchanged. Secondly, we also saw that Baupost sold completely out of their News Corp B shares position (NWS). This is interesting because they retained their full position in the A shares (NWS-A) but dumped the B shares. Maybe they saw something in regards to valuation or arbitrage there, who knows. One thing is clear though: they prefer NWSA over NWS. Keep in mind though that the bulk of their holdings in News Corp has always been through the A shares and that their B shares position was much smaller. Also, in terms of positions Baupost already held but added to, Viasat (VSAT) fits the bill. They've been adding to this name very recently as they just filed a 13G on VSAT.

Assets from the collective holdings reported to the SEC via 13F filing were $1.35 billion this quarter compared to $1.26 billion last quarter, so a slight uptick. Observant readers will note that Baupost in reality has an assets under management (AUM) base of around $20 billion, so there's quite a gap here. Firstly, keep in mind that Baupost typically keeps a lot of cash on hand. Secondly, Klarman has been out recently saying that equities are not as attractive as previously so it doesn't sound like he'll be too active there. Thirdly, he also mentioned that he is starting to like illiquid investments here and so that could also count for some of the assets. And lastly, remember that 13F's do not include short positions, holdings in other markets (foreign markets, futures, etc) or cash. So, all of the above combined helps to bridge the gap between 13F reported assets and their actual AUM.

Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Realistically, the position percentages are more watered down in their actual hedge fund portfolio.

We'll continue to monitor Baupost's 13G and 13D filings as that seems to be where the bulk of their action comes in. For more resources of Klarman and Baupost, check out the following:

- Klarman's interview from the annual Graham & Dodd breakfast
- Recent thoughts from Seth Klarman
- An interview with Seth Klarman

This is just one of the 40+ prominent funds that we'll be covering in our Q3 2009 hedge fund portfolio series. Baupost is the first fund we've covered but check back in each day as we'll be cranking out updates daily, identifying what the top hedge funds are investing in.