Profile of Seth Klarman & Baupost Group

Absolute Return + Alpha is out with an excellent in-depth profile of legendary investor Seth Klarman and his investment firm, Baupost Group. Stephen Taub has penned a nine page history lesson on the guru laced with various tidbits such as the fact that 'Baupost' is an acronym for the names of the four founders of the firm, but Klarman was left out of that because he 'came in later.' And, interestingly enough, we see that the founders took a chance on a relatively inexperienced Klarman at the time and paid him only $35,000 a year. That certainly turned out to be a hell of a deal (for the founders, anyways).

We've of course been longtime followers of Baupost Group given their patience, unique style, and impressive returns. We recently highlighted Seth Klarman's recommended reading list as a great resource for those trying to learn to be a better investor. And of course you can track down Klarman's own investing book, Margin of Safety to learn about his framework. Klarman's investing career speaks for itself and his is one of the few names that can be uttered in the same sentence as the almighty Warren Buffett.

While we've tracked Baupost Group's equity portfolio on an in-depth basis, this profile just goes to emphasize what little equity exposure Klarman truly has. Only around 7% of Baupost's overall assets under management are invested in equities. But, when you consider that these are the only publicly available disclosures, what other choice do we have? The article confirms that Klarman often prefers bonds as they are a senior security, offer more safety, and pay current principle and interest. Klarman is also famous for keeping large amounts of cash on hand (20-30%) as he lies in wait for screaming opportunities.

However, he currently doesn't see too many. As we've detailed thoroughly, Klarman is worried about the markets. He professed his concern at the recent CFA Conference in Boston and then again at the Ira Sohn Investment Conference. You don't see too many public appearances from the Baupost manager, so when he speaks, you listen. His concern for the markets obviously coincides with the fact that he now has around 30% of Baupost's assets in cash. While he doesn't focus on macro calls, Klarman will hold cash until he sees opportunities. And right now, he doesn't see too many opportunities.

Despite Klarman's typically high levels of cash, Baupost has still generated astonishing performance. It was up 22% in 2006, 54% in 2007, and around 27% in 2009. During the crisis in 2008, Klarman's funds lost "between 7% and the low teens." Still though, he certainly outperformed the market indices and much of his investment management brethren in a time of panic.

So while we'll have to wait and see if Klarman's extreme worry is duly warranted, you certainly have to take his words seriously as his pedigree is unquestionable. He says he refined his investing principles via mentors Max Heine and Michael Price and attributes much of his success to the fact he was able to learn under those talented managers. That experience, he says, is far more valuable than anything learned in a classroom. You certainly can't argue with that. And you can't argue with Baupost Group's 19% annualized returns, either.

The profile of Seth Klarman and Baupost Group is embedded below in its entirety courtesy of AdvisorAnalyst.com:



You can download a .pdf copy here.

Definitely an insightful and in-depth piece done by Stephen Taub. Make sure to take a free two week trial to Absolute Return + Alpha if you're interested in all things hedge fund. And as always, for more on Seth Klarman, you can continue to follow him via our coverage of Baupost Group.

Marko Dimitrijevic's Everest Capital: Profile

A handful of readers have requested coverage of Everest Capital, a Miami and Singapore-based firm run by Marko Dimitrijevic. We will make an effort to post what we can find on the firm in the coming weeks. For starters, Everest was founded in 1990 and currently manages $1.9 billion, spread across five individual strategies. The firm is best-known for its devotion to studying global macro and emerging markets trends, and then applying a heavy dose of fundamental, bottom-up research to identify opportunities. Of note, the firm prefers to invest across multiple asset classes, diversifying across not only debt and equity securities, but also commodities and currencies.

Earlier this month, the firm released its latest white paper, “The End of Emerging Markets?” In essence, the paper highlights the rapidly leveling playing field between emerging and developed market economies. Pointing to recent improvements in liquidity, corporate governance, volatility, and overall size, the paper makes the case that investors too easily resort to age-old excuses to limit allocations to emerging markets. By making such assumptions, investors could be penalizing themselves, missing out as more and more emerging economies position themselves as legitimate global economic players.

In addition, Everest's CIO, Dimitrijevic, was featured in a November 2 interview in Barron's. In the piece, he touches upon many of the ideas outlined in Everest's latest white paper. Most notably, he presents a compelling case as to why he believes nominal GDP is a misleading measure of economic production. By using U.S. Dollars as a measuring stick, he feels that countries' economic outputs are being over- and underrepresented on the global scale, too-easily distorted by differences in exchange rates and income levels. As a solution, he proposes that GDP be measured according to purchasing power parity, whereby one dollar basically purchases the same bundle of goods and services in all countries. According to Everest's research, such a measurement would show that emerging market economies are responsible for a much larger share of global economic output; in fact, they produce a nearly-equal amount of global economic output as their developed market counterparts. For more on Everest Capital, visit their website.

This article was by Dave Reynolds from HedgeCo.net.

In the future, we're going to be building out quick profile/biography pieces on various hedge funds and their managers in order to provide reference points going forward. In the mean time, here are some of our past in-depth profiles:

- Julian Robertson & Tiger Management

- Lee Ainslie & Maverick Capital

- Bill Ackman & Pershing Square Capital Management

Bill Ackman's Pershing Square: Profile & Biography

Continuing our series of hedge fund profiles and biographies, we turn our attention now to Bill Ackman of Pershing Square Capital Management. This is the third biography in our profile series where we've already covered hedge fund legend Julian Robertson of Tiger Management and also Lee Ainslie of Maverick Capital. (We also covered Robertson's big inflation bet as well).

Today is essentially 'Bill Ackman day' here on the blog as we also just covered Pershing's portfolio this morning. So, let's get right into it.

Background

Nowadays, Ackman runs Pershing Square, a well known value/activist based hedge fund that started in 2003. But before Pershing, there was Gotham Partners. He co-founded Gotham with David Berkowitz right out of business school and was forced to shut down around a decade later. They started with only $3 million in seed capital and would eventually garner investments from the who's who of the investment world. Gotham's investors included Michael Steinhardt, Seth Klarman, Leon Levy, Jack Nash, and the Ziffs. They saw 40% annual returns and life was good. At its peak, Gotham had around $500 million in assets.

However, Gotham would then invest in some illiquid assets and found themselves dealing with problems concerning investor redemptions. Ackman and Berkowitz then wound the fund down. Additionally, they would eventually become subject to investigation for possible illegal practices but they were found to have committed no wrongdoing. Ackman went on to form Pershing upon Gotham's dissolution. He started it in 2003 with $54 million in seed capital from only three investors. Nowadays, Pershing manages over $2 billion. Since 2004, Pershing Square has seen a 24% annual return according to Hedge Fund Research (as of 10/14/10).

Ackman received both his degree and his MBA from Harvard. He graduated magna cum laude in 1988 and graduated from Harvard Business School in 1992. Interestingly enough, Ackman is buddies with Whitney Tilson from Harvard. We've tracked Tilson in the past, as he is a fellow hedge fund manager (T2 partners). Portfolio revealed an intriguing story of how Tilson told Ackman to check out the company Farmer Mac on the long side, back when he was still managing Gotham. Ackman liked Farmer Mac as a play, but as a short instead. Thereafter he published a report entitled 'Buying the Farm' where he publicly disclosed his research and the fact that he was short. He was right, and he profited handsomely from its decline.

Investment Strategy/Methodology

Through presentations, investor letters, and just flat out tracking Ackman for a long time, we've gotten a great sense as to how Pershing runs their portfolios. The first (and most obvious) point is that they run a very concentrated portfolio. They like to focus on their best ideas and typically focus on 8 to 12 companies while always on the lookout for other opportunities. They like to say that they only need "a handful of new ideas per year." Their main goal is to generate long-term returns while avoiding permanent loss of capital. But then again, those are pretty typical goals for an asset manager. For their core funds, they try to avoid leverage but are not opposed to using options. And, that is very much the case in their Pershing Square IV fund which invests in Target common stock and options. They like to use options in activist scenarios where their influence can reduce the risk associated to the timing of options and typically use longdated, in the money contracts.

Longs

In terms of what they look for in investments, Pershing focuses on businesses that can generate free cash flow which are also trading at discounts to their intrinsic value. Additionally, they like to see companies with low financial leverage. Their entrance into General Growth Properties (GGWPQ) obviously contradicts this. However, they are playing this more-so for the distressed and event driven side of things as they walk with the company through bankruptcy.

Pershing often also takes activist stakes in the companies they are investing in. Prime example: Target (TGT). Ackman likes to get in there and create value for shareholders so they have more control over the outcome. Unfortunately, things with their Target position have been an uphill battle, to say the least. A great quote from Ackman has arisen from all the Target hoopla. He states, “The investment business is about being confident enough to know that you’re right and everyone else is wrong. Yet you have to be humble enough that you recognize when you’ve made a mistake. Earlier in my career, I think I had the confidence part pretty solid. But the humbleness part I had to learn.’’

Shorts

On the short side of their portfolio, they like to focus on absolute return by examining companies with bad businesses. They look for companies reliant on the markets for liquidity, companies with poor earnings, accounting issues, and other flaws as a red flag and an opportunity to short. One interesting thing to note about their shorts is that they often like to use derivatives to put on their positions as a means to maximize the reward of the play. As Pershing puts it, they look for their shorts to be "situations with asymmetric risk-reward profile, what we call a 'ceiling on valuation' ".

Lastly, we want to also point out that Pershing typically has over 20% of the assets under management (AUM) invested in 'cash' or Treasuries. At the heart of the matter, Pershing is an activist investor that seeks to institute change at various companies to generate value.

Portfolio Movements

The past few years, he has had notable short positions in the bond insurers such as MBIA (MBI) and Ambac (ABK). But, he has since closed those shorts. He also detailed his plans for Target to spin-off its real-estate to unlock value. His Pershing Square IV fund, which invests solely in Target (TGT), has seen poor performance (as Ackman apologized for in one of their investor letters). So far, it has been an uphill battle with Target in regards to instituting change at the company. He recently failed to get his board of directors elected as he staged a large proxy fight against the company. However, Ackman is not giving up on this name and will continue to fight for change at Target. Target is still their largest position due to their Pershing Square IV fund. We examined Pershing's portfolio earlier today as a part of our hedge fund portfolio tracking series.

In terms of other portfolio positions, we saw that they have a large position in EMC (EMC) and in the first quarter of 2009 added new stakes in Yum Brands (YUM) and Apartment Investment & Management (AIV). In terms of positions they sold completey out of, they have recently sold their Dr Pepper Snapple (DPS) shares and their Wendys Arbys (WEN) shares.

In past interviews, Ackman has stated that he is, "long-term bullish on America but not on things turning around in the next few months, or even 12 months. We've had the equivalent of a heart attack, but now we are in recovery, hopefully. It takes time to heal."

Performance

Pershing Square's main fund was up 0.2% for the month of May 2009 and was up 1.2% for the month of June. They are now up 10.5% net year to date for 2009. In terms of positions that are each larger than 0.5% of the portfolio, they have 9 longs and 3 shorts. Additionally, they have around $900 million of notional exposure to credit default swaps. On a relative basis, Pershing escaped 2008 without too much of a dent. Their funds beat the indexes, but still lost money, as they were down around 11-13%, depending on the fund.

Resources

Lastly, we'll finish up with a list of resources we've collected regarding Bill Ackman's Pershing Square:

- Pershing's General Growth (GGWPQ) Presentation @ Ira Sohn Conference

- Bill Ackman's interview with Charlie Rose (4/24/09)

- Bill Ackman talks GGWPQ & TGT


In an interview with Portfolio, Bill Ackman said he was an "extremely resilient person." And, hopefully our biography has given you a bit more background and sense as to why we track his movements here on Market Folly. If you enjoyed this post, then consider getting our free updates via email or you can also get our free updates via RSS reader.

Profile/Biography on Lee Ainslie & Hedge Fund Maverick Capital

Continuing our series of hedge fund profiles and biographies, we turn our attention now to Lee Ainslie of Maverick Capital. We thought this transition was appropriate given how we just yesterday initiated our profile series with coverage of hedge fund legend Julian Robertson of Tiger Management. (We also covered Robertson's big inflation bet as well). We turn to Lee Ainslie of Maverick Capital now because Ainslie formerly worked under Julian at Tiger. As such, he is a 'Tiger Cub' and employs much of the investment methodologies he learned while at Tiger as their technology analyst.

Ainslie graduated from the University of Virginia and then received his MBA from the University of North Carolina. He founded Maverick Capital at age 29 in 1993 with $38 million in seed capital from Texas entrepreneur Sam Wyly. Maverick has offices both in Dallas and New York and now managers well over $5 billion. They are a long/short equity hedge fund in the 'old school' sense of the word. The truly are a hedged fund as they focus on equities on both the long and the short side. In an interview with McKinsey, Ainslie has said that, "Our goal is to know more about every one of the companies in which we invest than any noninsider does. On average, we hold fewer than five positions per investment professional - a ratio that is far lower than most hedge funds." They focus on exhaustive research and that is their edge. This methodology carries over from his days at Tiger Management, who was also known for their extensive research.

Ainslie learned one thing in particular from Robertson which he still does to this day. When he reviews his gameplan and stocks, he tests his conviction by gauging whether the name is a buy or a sell; there is no hold. Ainslie says, "Either this security deserves incremental capital at the current price point or it doesn't - in which case, let's sell it and put the money to work in a security that deserves that incremental capital."

Maverick's strategy is straight up stock picking, both long and short. While they focus on both sides of the book, we've been told before that they do not deploy pairs trades. One thing Maverick does use, however, is multiple variants of risk management. Ainslie likes to manage risk appropriately by keeping positions tight and under control. Typically, he likes to keep each position top out at around 5-8% of the overall portfolio. This discretion allows for solid position diversification and risk mitigation. Additionally, instead of having one or two people making all the investment decisions, Maverick has six industry sector heads. The industry heads of the consumer, health care, cyclical, retail, financial, and technology sectors all report to Ainslie. While Ainslie still has the ultimate say, he considers them peers and values the team culture at Maverick. In an interview in the past, Ainslie has said "I spend the majority of my day talking to them because they know so much more about each of their stocks than I could ever hope to. We're all peers."

Each sector head typically has around 7 analysts and so there is a real team atmosphere both on a micro a firm-wide level. Ainslie serves as a centerpoint amongst the teams, as his job is to weigh the input from the heads and allocate the right amount of capital to the best ideas. It's key to also point out the impact Steve Galbraith has at Maverick. Galbraith joined Maverick after leaving his post as chief equity strategist for Morgan Stanley. He plays just as an important role in the investment plan as Ainslie because he offers what Ainslie says he himself lacks: a more macro perspective. They don't use price targets and instead adapt as the world around them changes, constantly re-evaluating their investments. Historically, Maverick has run 25-75% net long, with it typically falling around the 49% range. Additional figures show that in the past they've allocated 140-145% of capital to stocks expected to rise, while allocating around 100% of capital to their shorts.

As such, they employ some leverage, typically landing their gross exposure at around 200-250%. Ainslie makes the case for using this slight amount of leverage as a tool to run a more balanced portfolio. Without leverage, a 75% long and 25% short portfolio gives you a ratio of longs:shorts of 3:1. But, when employing a slight amount of leverage, he can run his book 150% long and 100% short. That leaves his ratio of longs:shorts at a more risk-friendly 1.5:1.

What is interesting about their short positions is that they don't short things simply as a hedge. They don't usually use index hedges and instead focus on individual stocks/companies. They harp on risk management by allocating their plays equally by both industry and world region. Maverick is a long/short equity fund and pick stocks, that's all there is to it. This is one of the main reasons we track them (& the other Tiger Cubs) in our hedge fund portfolio tracking series. By following funds that use a fundamental bent and focus on stockpicking, we can be assured that they typically have a longer investment timeframe. They are investing in their portfolio companies rather than trading rapidly in and out of them. We're covering Maverick's holdings today, but we've already covered some of Ainslie's fellow Tiger Cubs including Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, and Andreas Halvorsen's Viking Global. All of those funds have solid track records and are good to track due to their investing methodologies.

Getting back to Maverick, it is also prudent to point out that they focus a lot on both valuation and management teams. Ainslie points out that, "We have made the mistake more than once of not investing in a company with a great management team because of valuation concerns - only to look back a year later and realize we missed an opportunity because the management team made intelligent, strategic decisions that had a significant impact." Maverick typically looks for a one to three year holding period for their investments and seeks companies that will out or under-perform by a wide margin on an annualized basis. Additionally, they don't like to evaluate the success of a company by whether or not they beat the market's expectations on quarterly earnings. However, they do dissect the numbers and like to compare their own expectations with the reality of the company's performance.

When talking about Maverick's opportunity set, Ainslie has said that, "At Maverick, we define our investment universe as all stocks that have an average daily volume greater than $10 million - there are roughly 2,500 such stocks around the world. Since we may hold long or short positions in any of these stocks, we have about 5,000 different investment opportunities." It is clear that Maverick ultimately wants to be invested in liquid companies, as they have previously stated that they could liquidate more than 70% of their portfolio within a week's time. This is prudent to note when you consider numerous funds in the financial crisis had problems with illiquid positions.

As of the end of 2008 they had six main funds that we're aware of: Maverick Fund, Maverick Levered, Maverick Neutral, Maverick Neutral Levered, Maverick Long, and Maverick Long Enhanced. The additional funds contain the same positions as their main fund, but they contain different quantities based on the strategy and fund structure. Maverick uses a value approach (obviously learned from Julian) and one of their most popular metrics is comparing companies' enterprise value to their sustainable free cash flow.

They are an ideal fund for any aspiring stock picker to follow and hopefully you now see why. Check out Maverick's investments and recent portfolio changes to get a better idea as to what they're up to these days. Also, make sure you read the other posts in our Market Folly hedge fund Profile/Biography Series: Julian Robertson (Tiger Management). Stay tuned, as we'll be adding new funds to the series periodically.


Sources: Investor Letters, Various Interviews, HedgeHunters, & McKinsey

Profile/Biography on Hedge Fund Legend Julian Robertson (Tiger Management)

We're going to start a new series here on Market Folly that details the backgrounds of various hedge fund managers in a biography/profile format. And, to kick things off, we figured what better person to start with than Julian Robertson? For those unfamiliar with Robertson, then here's what you need to know: He is the definition of a hedge fund legend. After attending the University of North Carolina, Robertson served as an officer in the US Navy and worked as a stockbroker for Kidder Peabody. He then founded and grew his (now defunct) hedge fund Tiger Management from $8 million at launch to over $22 billion in 1998 at its peak. And, as listed on our Tiger Cub biographies page, Tiger compounded a gross rate of 31.5% between 1980 and 2000. But, after losses of 4% in 1998 and 19% in 1999, Tiger shut down as the dot-com bubble expanded right in front of his eyes. He avoided what he deemed to be 'irrational investing.' The tech bubble would indeed be irrational investing, but his fund wouldn't be around to see it through. A few major bets of his went south (including US Air) and enough was enough.

In terms of his investment style, Robertson takes a macro approach, finds a smart idea, researches it exhaustively, and places a big bet. And, when he feels he is more than correct, he will 'bet the farm.' Since Tiger's closure, Robertson has put up equally impressive performance numbers managing his own money. Back in January of 2008, it was noted by Fortune that Robertson had seen a total return of over 400% in the 8 years gone by since closing his fund. And, he even predicted the financial crisis over two years ago.

Not only has Robertson done well for himself, but he has essentially reinvented Tiger Management in the form of 'Tiger Cubs.' After Tiger Management's dissolution, numerous analysts and right-hand men started their own funds. These funds were nicknamed 'Tiger Cubs' due to their ties to Robertson and his old fund. The principles, research, and investment methodologies instilled by Robertson at Tiger now are carried on (in slightly modified forms) by numerous other hedge funds; many of whom we cover here on Market Folly in our hedge fund portfolio tracking series. Now legends in their own right, well-known Tiger Cub managers include Lee Ainslie of Maverick Capital, Stephen Mandel of Lone Pine Capital, John Griffin of Blue Ridge Capital, and Andreas Halvorsen of Viking Global, amongst many others.

Robertson also gave start-up money to a handful of younger analysts when he unwound his fund. These seeded Tiger Cubs became mentored by Robertson and began their own track records of success. Two of the most well-known funds Robertson initially seeded include Chase Coleman's Tiger Global and Bill Hwang's Tiger Asia. As of the beginning of 2008, Tiger Global's 7 year average return was over 43%. As you can see, Robertson's ways still live on through many other successful funds. In fact, we noted that hedge fund portfolio replicator Alphaclone has even created a Tiger Cub clone portfolio that has beaten the S&P 500 by 15% annualized since 2000 by using a portfolio cloning the positions of all the Tiger Cub hedge funds.

Robertson's success has landed him on Forbes billionaire list and it really should come as no surprise. These days, Robertson is both managing his own money and monitoring his stakes in the various Tiger Cub funds he seeded. He often shares his thoughts and positions with them and vice versa. It is often a round table of ideas in which Robertson has fun becoming re-energized by the youthful players he surrounds himself with. Additionally, Robertson is an active philanthropist and serves on numerous boards nowadays.

In terms of his recent action, we posted in February that he is extremely bearish on both US and world markets. He likens our situation to that of Japan in 1989 but thinks we are worse off. As we've also noted numerous times in the past, Robertson is fond of the payment processing duopoly of Mastercard (MA) and Visa (V), as they bear no credit risk. When we saw Robertson's portfolio, we also noticed that he held various tech giants such as Apple (AAPL) and Microsoft (MSFT). Julian was not alone in his fondness for Microsoft, as his former right hand man John Griffin of Blue Ridge Capital also has a very large MSFT stake. You can see Julian's thoughts on his positions in his video interview with Bloomberg.

Taken from his very recent May/June 2009 interview with Value Investor Insight, Julian also has revealed some of his other portfolio moves by saying, "We own an Indian Zinc mining company called Hindustan Zinc (HZ:IN), which is probably selling for 4-5x earnings. Zinc is an important component in a wide variety of alloys, and has recently been selling for below its cash cost of production. You almost know that isn't going to last. Zinc would also seem to me to be a very good inflation hedge. I love energy stocks. Without making any prognostication on oil prices, we think based just on cash flow that oil stocks are very attractive, and of course will be much more so if oil prices return to anywhere near where they were last summer. Some energy stocks we own are Occidental Petroleum, Talisman Energy, Ultra Petroleum, and TriStar Oil & Gas. I really like some of the Canadian oil-sands plays, because there's probably more leverage to the price of oil there than anywhere else ... Equities are certainly better than cash. In particular, I'd expect the best things to buy to be natural resources stocks." So, there you have it. Robertson definitely sees natural resources and energy plays as a nice investment going forward.

And, most notably, Robertson has been buying puts on longer-term treasuries. He thinks rates could hit 7% easily and could go as high as 18%. He's talked about this play in numerous forms, as he also recommended playing a steepener swap at a Tiger Cub hedge fund panel. This morning, we've just written an article that elaborates on this thesis in detail. You can read about Julian Robertson's steepener play here. We'd highly recommend it, as this is shaping up to be one of Julian's "bet the farm" plays.

Simply put, Julian Robertson is a hedge fund legend. He's generated ridiculously solid returns, he's carried on his legend in the form of the Tiger Cubs, and most importantly, he predicted the financial crisis 2.5 years ago. If he's not worth listening to, then we don't know who is. For more information on Julian, check out Daniel Strackman's book entitled, Julian Robertson: A Tiger in the Land Of Bulls And Bears.