Dan Arbess' Xerion Fund Likes Chemical Stocks

Per Bloomberg's Hedge Fund Brief, Dan Arbess' Xerion Fund (part of Perella Weinberg Partners) is betting on chemical stocks. In particular, he likes those companies that utilize lower-cost natural gas in production, such as LyondellBasell (LYB).

Chemical maker LYB emerged from bankruptcy last year and has been a big favorite amongst investment managers. In fact, LyondellBasell was a consensus buy in the fourth quarter amongst hedge funds we track in our Hedge Fund Wisdom newsletter. In addition to Xerion, Dan Loeb's Third Point LLC holds a large stake in LYB as it is their fifth largest position.

Arbess said that, "There are a lot of companies that can just take higher feedstock costs and pass them right on to their customers. They are being sold off very aggressively right now and can be picked up. We liked them 10-15% higher before the sell-off; we love them down here." In addition to LYB, Arbess fancies Solutia (SOA) and Rockwood Holdings (ROC).

Arbess also reiterated his positions in exploration and production oil companies in Brazil and West Africa. We've posted about these investments in a previous investor letter that detailed Xerion's 2011 investment strategy & outlook.

Dan Arbess' Xerion Fund Prefers Commodities Over Equities

Daniel Arbess' hedge fund Xerion is out with its latest letter to investors. The fund, a part of Perella Weinberg Partners, has returned 18.68% annualized net since inception in January 2003 and currently manages around $2.3 billion. Maybe the most impressive aspect about Arbess' numbers is the fact that he's done so with a correlation to the S&P 500 of only 0.34%.

The hedge fund "seeks to draw on fundamental valuation skills to identify opportunities that offer the potential for asymmetric returns--downside protection with upside potential." Xerion is named for an alchemy tool whose legend says it can turn base metals into gold. Apparently, it is also supposed to be an elixir of enlightenment. When markets crumbled in 2008, Xerion returned 0.31%, beating out numerous hedge funds that suffered. In 2009, the hedge fund was up 35.33%. Through October in 2010, Xerion is up 7.34% net.

Arbess has been positioned around 61.6% net long with equity strategies around 43.7% net long, credit strategies 35.6% net long and macro strategies -17.7% net. At the end of the month, their top 10 longs comprised 34.8% of equity. Some of the hedge fund's top performers included positions in HRT Participações em Petróleo (HRT), Abitibi (process driven distressed credit), LCORA (credit special situation), Solutia (SOA - thematic Asian growth equity), and Ivanhoe Energy (IVAN - special situation equity).

"Quantitative Easing May be Counter-Productive"

Arbess dedicates a decent portion of his commentary to the Federal Reserve, quantitative easing, and his belief that while QE may spur equity price advances, it will do little to make a real difference in the economy.

He writes, "The unintended consequences of QE are eroding confidence in the Dollar and the entire monetary system. We generally prefer commodities over equities as a medium term play on the 'Fed Put'. Equities may not keep going up if QE doesn't work, but it seems to us that commodity-related investments will have legs whether QE works and economies improve, or QE doesn't work and more Dollars are left chasing the same commodities."

This viewpoint is generally aligned with that of John Burbank's hedge fund Passport Capital as Burbank favors hard assets. However, their shared thinking contrasts with that of David Tepper and Appaloosa Management. Tepper doesn't want to 'fight the Fed' and thinks equities will continue to rally.

"Shake Hands With China"

One of Arbess' ongoing themes has been to own what China's government and consumers desire. He argues that China is transforming itself from the world's factory into the world's consumer. As such, the Xerion fund is investing in hard assets that China and developing nations need to build infrastructure and fuel urban growth. The hedge fund has also been researching cheap producers in southeast Asia and retail distributors that will serve this rising consumer.

HRT Participações em Petróleo (HRT)

Arbess' letter also singles out their investment in newly IPO'd HRT. Xerion made an initial $20 million private investment back in November 2009 at a $360 million capitalization. HRT went public raising $1.5 billion at a pre-money valuation of $1.8 billion. It is a Brazilian exploration and development company formed by Petrobras seismic experts who provided consulting advice to large oil companies.

Of the company Arbess writes, "We think this Company is just getting started, with the IPO implying a reasonable valuation for HRT's known onshore oil assets, but discounting its substantial gas potential in the Amazon and offshore hydrocarbon blocks in Namibia. We like this investment at its current valuation and are looking forward to favorable news as the Company's drilling program ramps up over the next several months."

Xerion Portfolio Exposures

Interestingly enough, Arbess writes that, "Our net long corporate exposures are still weighted nearly 2:1 credit to equity. About three quarters of our equity exposures (and hedges) are leveraged to the global industrialization theme, mostly through what we intend to be asymmetric commodity plays like HRT. About a quarter of our equity exposures are more domestically-focused, playing for either idiosyncratic events or high operating leverage, strong free cash flow or secular strength in a weak economic environment (hotels, transportation, technology, etc.)."

Currently, the fund has 21.4% of assets under management dedicated to special situations equities (mainly hard asset-focused). Arbess makes a footnote that the Xerion fund has been looking at stressed credit situations in the arenas of food service, lodging, and technology. Lastly before everyone asks, unfortunately we can't post a copy of the actual letter due to revealing watermarks.

We'll continue to provide updates on Arbess' hedge fund, but in the mean time you can view a previous Xerion presentation: Investing as the foundation shifts.

Dan Arbess Ira Sohn Presentation: Investing As The Foundation Shifts

Today again courtesy of Dealbreaker we wanted to highlight Dan Arbess' recent presentation from the Ira Sohn Investment Conference entitled, 'Investing As The Foundation Shifts'. We had previously summarized the Ira Sohn Conference and have detailed numerous presentations from the event. This time around, we're taking a deeper look at the slideshow from Dan Arbess, the Xerion Fund manager at Perella Weinberg Partners. Just yesterday, we looked at Dan Arbess' portfolio commentary and identified that he is seeing opportunity in stressed credit and owning what China wants to buy. And now, we'll focus on some of his additional investment ideas.

When we summarized the Ira Sohn Investment Conference, we noted that Arbess was bullish on China exposure and in particular, Yum Brands (YUM) given their prolific expansion into the country. He isn't alone in his conviction here as we've seen a slew of hedge funds add positions in Yum Brands in recent quarters. In particular, we made note of Bill Ackman's YUM stake.

If you hadn't already guessed from the title, the theme of Arbess' presentation centered around a shift in the global economy. He wants to 'shake hands' with China and overall sees less borrowing in the Western world coupled with more consumption in the Eastern world. He says you can play this theme by shorting overleveraged Western producers, shorting weak currencies, and hedging monetary debasement with precious metals and miners. Arbess is also bullish on Ivanhoe (IVN) due to its solid assets and position in the metallurgical coal space.

This echoes what many hedge funds have already practiced. Hedgies have been quite short the euro (currently a weak currency) but they have been covering as of late. Additionally, tons of prominent investment managers have boosted gold exposure in their portfolios either by adding the physical metal or gold mining companies. Arbess doubts this is a top in gold and is using exposure there to hedge against inflation.

Sticking with the Asian growth theme, the Xerion Fund manager also likes Solutia (SOA) and Celanese (CE) as they both are seeing solid growth overseas. Arbess also seemingly pokes fun at a previous presentation we've posted up from Vitaliy Katsenelson entitled, China: The Mother of All Black Swans by including a picture of the lead slide from that slideshow with a giant "NOT" stamped across it. (How about a nice little Borat impersonation here for our comedic readers: "China is the mother of all black swans..... ... .....NOT.")

Ahem, anyways. Embedded below is Daniel Arbess' presentation from the Ira Sohn Conference, "Investing As The Foundation Shifts":



You can download a .pdf copy here.

For more from Arbess, head to his Xerion Fund portfolio commentary. We also recommend viewing the other presentations from the Ira Sohn Conference including David Einhorn's speech, as well as Bill Ackman's presentation and last but not least, Steve Eisman's latest investment thesis. You can also view a summary of the conference here.

Philip Falcone's Harbinger Capital Trims Two Positions

Philip Falcone's hedge fund firm Harbinger Capital Partners just recently filed two separate amended 13D filings to detail changes to two of their portfolio positions. Firstly, we see that Falcone and his hedge fund have sold even more New York Times (NYT) shares. We just recently covered their NYT sale and it seems they are selling for the third time in the past four months. Most recently, they have sold 2,651,635 shares at a price of $8.35 according to Form 4 and amended 13D filings with the SEC. The transaction took place on December 1st, 2009 and they are now left with 18,386,799 shares in total which translates to a 12.79% ownership stake. So while they definitely still have a sizable stake in NYT, their two recent sales are notable.

In the past, we've taken a step back and wondered whether or not newspapers are a dying industry. Their business model uncertainty still continues and many are concerned. Yet again, Harbinger has sold shares at a loss. They initially acquired their stake between $15-20 per share almost two years ago when they invested over $500 million. Their current stake is down from their previous high of around 20% ownership of the company. We'll have to see if they continue to sell going forward, as in the past they had sought suitors for their NYT stake. We also note that Mexican billionaire Carlos Slim has a hefty position in NYT as well, so there are definitely some prominent players in NYT.

Secondly, Harbinger Capital Partners has again sold more shares of Solutia (SOA). This wind down has seemingly been in slow motion as they have been selling shares in SOA since back in June of this year. Their most recent sales were at the beginning of November and this time is no different. As per their recent amended 13D filing with the SEC, Philip Falcone's hedge fund now shows a 4.4% ownership stake in Solutia (SOA) with 5,391,200 shares owned. This means that within the past month, Harbinger has sold 2,867,853 more shares.

Philip Falcone runs his $6 billion hedge fund with a focus both on distressed and equity plays and often takes concentrated positions in companies. For more of their recent activity, we put up a post detailing a portfolio update and also covered the execution of their Calpine offering (CPN) as well. For more on Harbinger, you can check out some of their UK positions too.

Taken from Google Finance, The New York Times Company is a "diversified media company, including newspapers, Internet businesses, a radio station, investments in paper mills and other investments. The Company is organized in two segments: News Media Group and the About Group. Additionally, the Company owns equity interests in a Canadian newsprint company, a supercalendered paper manufacturing partnership in Maine, and Metro Boston LLC, which publishes a free daily newspaper in the greater Boston area."

Solutia is "a global manufacturer and marketer of a variety of chemical and engineered materials that are used in a range of consumer and industrial applications. The Company maintains a global infrastructure consisting of 25 manufacturing facilities, six technical centers and over 29 sales offices globally, including 14 facilities in the United States. The Company’s segments are Saflex, CPFilms and Technical Specialties."