Ken Griffin's Citadel Portfolio: Hedge Fund 13F Filing

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

Next up is Ken Griffin's Citadel Investment Group. Ken got his start trading options from his dorm room at Harvard his freshman year. He then launched a convertible bond arbitrage fund his sophomore year and by his senior year, he had $1 million from investors invested in that strategy. Since then, Citadel has seen average annual returns of around 20%. The year of 2008 was a difficult one for them though, as their flagship Wellington and Kensington funds were down big. In fact, they were among the top 10 hedge fund asset losers. Since they would not be recouping performance fees from those funds for a while it seemed, they did what any sensible hedge fund manager would do: start new funds where they can collect the fee again. This is an endless boom bust cycle we've seen in hedge fund land. If you fail, then just come back with a new entity and you're good to go.

Some interesting facts: Citadel is responsible for almost 30% of US equity options volume and 8% of NYSE and Nasdaq volume. Also, Ken Griffin graces Forbes' billionaire list for his endeavors with Citadel. We also wanted to point out that in addition to tracking Citadel's US positions, we can track their positions taken on the London Stock Exchange. Recently, Citadel revealed a stake in Songbird Estates via the contract for difference (CFD) market.

Before we get to their portfolio holdings, we want to insert a cautionary note. Tracking Citadel via 13F isn't particularly useful due to the complex nature of their portfolio. We've elaborated on this issue at the end of the article. But for now, just take the holdings below with a grain of salt. The following were Citadel's long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.


Some New Positions (Brand new positions that they initiated in the last quarter):
nothing notable within the top 50 positions in their portfolio


Some Increased Positions (A few positions they already owned but added shares to)
E*Trade Financial (ETFC): Increased by 979.6% (note that this activity is as of June 30th. Since then, there have been developments with this position and we'll update that in a separate post).
Apple (AAPL): Increased by 254.9%
Bank of America (BAC) Puts: Increased by 223.7%
Google (GOOG) Calls: Increased by 106.3%
Freeport McMoran C&G 5.5% (FCXGL) Puts: Increased by 83.5%
Walmart (WMT) Calls: Increased by 59.2%
Microsoft (MSFT) Puts: Increased by 32.3%
Conoco Phillips (COP) Puts: Increased by 28.5%
Illumina Bond: Increased by 27%
JPMorgan Chase (JPM) Puts: Increased by 24.5%
Research in Motion (RIMM) Puts: Increased by 22.9%


Some Reduced Positions (Some positions they sold some shares of)
CME Group (CME) Calls: Reduced by 98.8%
Microsoft (MSFT) Calls: Reduced by 50.3%
International Business Machines (IBM) Calls: Reduced by 40.9%
Hologic Bonds: Reduced by 31.2%
Goldman Sachs (GS) Calls: Reduced by 30.7%
Goldman Sachs (GS) Puts: Reduced by 25.6%
Registere Bond: Reduced by 23.3%
International Business Machines (IBM) Puts: Reduced by 21.5%
Wells Fargo (WFC) Calls: Reduced by 20.5%


Removed Positions (Positions they sold out of completely)
Ford Motor Preferred A Bond, Alexion Pharma Bond, Fisher Science Bond, Sybase Bond, Comcast HLD Zones1 (CCZ), Broadcom (BRCM), Lions Gate Bond, Mentor Graphics Bond, Kendle International Bond, St. Mary Land & Exploration Bond, Alliant Techsystems Bond, Cadence Design Bond, Genesco Preferred Bond, State Street (STT), Actuat Bond, Albany International Bond, Ferro Bond, Covidien (COV), Great Atlantic & Pacific Tea Bonds, Texas Instruments (TXN), Tenaris (TS), Millipore Bond, Griffon Corp Bond, Resmed (RMD), Chesapeake Energy Bond, Airtran Bond, Agco Bond, and Hornbeck Offshore Bond.


Top 15 Holdings by percentage of assets reported on 13F filing *(see note below regarding calculations)

1. Google (GOOG) Calls: 1.49%
2. Cephalon (CEPH) Bond: 1.27%
3. Amgen (AMGN) Bond: 0.97%
4. Apple (AAPL) Puts: 0.93%
5. Apple (AAPL) Calls: 0.91%
6. Google (GOOG) Puts: 0.91%
7. EMC (EMC) Bonds: 0.74%
8. Goldman Sachs (GS) Puts: 0.74%
9. Exxon Mobil (XOM) Calls: 0.73%
10. Medtronic (MDT) Bonds: 0.73%
11. Symantec (SYMC) Bonds: 0.69%
12. Gilead Sciences (GILD) Bonds: 0.69%
13. PG&E (PCG) Bonds: 0.68%
14. Exxon Mobil (XOM) Puts: 0.64%
15. JPMorgan Chase (JPM) Calls: 0.55%
    

The main thing with Citadel's portfolio is to take it all with a grain of salt. They hold a ton of positions and so we only tried to cover the biggest moves they made. More than anything, this look at their 13F is for novelty purposes as we can't really glean a whole lot from it. Many readers just like to see what the top positions are at Ken Griffin's firm and we're happy to oblige. But, for tracking or cloning purposes, it's not all that useful. Why? Since Citadel has the vast majority of their holdings in options markets, it makes it hard to decipher their true position in any given company. For instance, they can be holding both puts and calls on any given stock at a wide variety of strikes and expirations. Since they aren't required to disclose that information, we don't truly know the extent of their holdings. Additionally, they could be selling options against their position which are not required to be reported on a 13F filing. So, we're also missing out on seeing a big chunk of their portfolio to begin with.

Lastly, you'll also notice that each of Citadel's positions only represents a tiny amount of their overall level of reported assets on the 13F. Their largest position is a mere 1.49% of reported assets. What's more is that this percentage becomes even smaller if it were represented as a portion of assets under management rather than just 13F assets. (This goes back to the fact that 13F's only report longs... their overall AUM is much larger than the $33 billion reported on the filing. As such, each position becomes a smaller portion of their overall total). The main point here is that we can't truly see their directional bets so it's best to just glance at their portfolio, go "hmm" and move on.

Besides the typical options positions, we do notice a decent amount of bonds in Citadel's portfolio, so take that for what it's worth, with Cephalon and Amgen being their largest bond positions. The other interesting thing about their portfolio is the fact that they didn't really add any new positions. They were basically just adjusting the sizes of current positions. In terms of sales though, they sold completely out of a bevy of names, as outlined above.

Due to the complexities of Citadel's portfolio and the fact that it honestly isn't very useful to track them via 13F, we are most likely going to remove them from our hedge fund portfolio tracking series. HOWEVER, if numerous readers comment on this post or email us telling us they still want they updates, we will be happy to oblige. One thought we had was to simply update only the very major position changes we see going forwards. Let us know your thoughts in this regard. In our opinion, tracking Citadel via 13F is about as useless as tracking Jim Simons' Rentec via 13F. We might just only report on Citadel's bond positions from here on out, we'll see.

*Note regarding portfolio percentages: Assets from the collective holdings reported to the SEC via 13F filing were $33.8 billion this quarter compared to $28.3 billion last quarter, so quite a noticeable increase in assets invested on the long side. 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. In reality, the percentages are more watered down in their actual hedge fund portfolio. If you were to calculate percentage weightings in the actual hedge fund, they would obviously be lower since you would divide position sizes by their total assets under management (a larger number than the one reported on the 13F).

This is just one of the 40+ prominent funds that we'll be covering in our Q2 2009 hedge fund portfolio series. So far, we've already covered the holdings of Bill Ackman's Pershing Square Capital Management, David Einhorn's Greenlight Capital, Seth Klarman's Baupost Group, Dan Loeb's Third Point LLC, and Stephen Mandel's Lone Pine Capital, George Soros (Soros Fund Management), Lee Ainslie's Maverick Capital, Philip Falcone's Harbinger Capital Partners, David Stemerman's Conatus Capital, Eric Mindich's Eton Park Capital, John Griffin's Blue Ridge Capital, Thomas Steyer's Farallon Capital, and Boone Pickens' BP Capital Management. Check back each day as we cover prominent hedge fund portfolios.

Jeffrey Gendell's Tontine Associates Boosts Willbros Group (WG) Stake: 13G Filing

Jeffrey Gendell's hedge fund firm Tontine Associates recently filed a 13G on Willbros Group (WG) due to activity on August 31st, 2009. In the filing, they've disclosed a 5.36% ownership stake in WG with 2,125,661 shares. This is an increase from their last disclosure when they held 1,744,166 shares as of June 30th, 2009. In the span of 2 months, Tontine has added 381,495 shares of Willbros Group. We haven't yet covered Tontine Associates in our hedge fund portfolio tracking series yet, but be on the lookout when we'll detail all of their long US equities positions. In terms of other notable recent activity, we saw that Tontine sold shares of Broadwind Energy (BWEN).

Tontine specializes in macro investing by taking large, concentrated positions in companies they feel are poised to benefit from select themes. Occasionally, an activist role will be taken if necessary. While Tontine returned over 100% in both 2003 and 2005, the year of 2008 was one to forget as their Partners fund ended up -91.5% and their 25 LP fund was -63.6%. As such, two of their hedge funds closed down and Tontine found themselves on the top hedge fund manager losers of 2008 list. However, they've started off 2009 with a bang. When we last checked their performance in May, their 25 fund was up 72.3% and their Partners fund was up 49.8% for the year as of that time.

Taken from Google Finance, Willbros Group is "an independent international contractor serving the oil, gas and power industries, government entities, and the refinery and petrochemical industries. Willbros operates its business in three segments: Upstream Oil & Gas, Downstream Oil & Gas, and Engineering. These segments operate primarily in the United States, Canada, and Oman. The Company provides engineering; construction; engineering, procurement and construction (EPC), and specialty services to industry and governmental entities worldwide, specializing in pipelines and associated facilities for onshore and coastal locations."

Hedge Fund Panel Video: Steinhardt, Gerstenhaber & Cooperman

Once in a blue moon, you get something truly worth watching out of CNBC and this is one of those blue moons. Here's a great hedge fund panel video featuring none other than industry legends Michael Steinhardt (previously of Steinhardt Partners, now with WisdomTree Investments), Leon Cooperman of Omega Advisors, and David Gerstenhaber of Argonaut Capital. RSS & Email readers: come to the blog to view the video.

Technical Analysis Trading Setups: Weekly Watchlist Video

Here's the latest weekly watchlist from the OptionAddict where he looks at some technical analysis patterns and trading setups. Here's the video:

Free Educational Videos & Analysis From The CME Group

When hedge funds need advising, Dan Gramza is their guy. Today we're excited to bring you some free educational and analytical content from the CME Group. Dan Gramza has an MBA from DePaul and began his trading career at the Chicago Rice and Cotton Exchange. Nowadays, he is an advisor to hedge funds and is an instructor for the Chicago Mercantile Exchange Education Center, amongst other programs. While hedge funds and the like typically pay for his advice and insight, you can check out his free video here. Note that you'll have to supply an e-mail address to get the free presentation. But, once you're in there, you'll have access to Dan's presentation and a bunch of other educational content from the CME Group too.

Boone Pickens' BP Capital: Transocean (RIG) Still Top Holding (13F Filing)

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

Next up is T. Boone Pickens' hedge fund, BP Capital Management. He runs an energy-centric set of funds out of Dallas, Texas and is a big advocate of Peak Oil Theory. On the positive side of things, he has landed himself on Forbes' billionaire list. Yet on the negative side of things, he also graced the list of top hedge fund manager losers of 2008.

To say Boone had a rough 2008 would be putting it lightly. His energy fund was down 98% and his equities fund down 64% in a year to forget for the energy maverick. That said, BP returned 300% in 2005 and so it looks like you better have a strong stomach to survive the volatility here. We say this of course because we got word that Boone was seeking investors for hedge funds back in July. He started trading the new portfolios back in February and was up 79% already.

We'll be watching Boone's funds closely now that he's been personally hurt by them so much. He obviously doesn't want to blow up (again). In our recent hedge fund news summary, we also saw that Boone was scaling back his wind energy projects too. Looks like tough times all around for our favorite resident energy maverick. At 20%, he is the largest investor in his funds and will live and die by them. And for that, we cannot criticize him. We love to see managers with a lot of 'skin in the game.'

The following were BP Capital's long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.


Some New Positions (Brand new positions that they initiated in the last quarter):
Forest Oil (FST)


Some Increased Positions (A few positions they already owned but added shares to)
Questar (STR): Increased by 40%
Cabot Oil & Gas (COG): Increased by 37.5%


Some Reduced Positions (Some positions they sold some shares of)
Transocean (RIG): Reduced by 27.8%


Removed Positions (Positions they sold out of completely)
Alpha Natural Resources (ANR)
Consol Energy (CNX)
Massey Energy (MEE)
Halliburton (HAL)
Schlumberger (SLB)
Foster Wheeler (FWLT)
Fluor (FLR)
Weatherford (WFT)
McMoran Exploration (MMR)


All of their long holdings by percentage of assets reported on the 13F filing *(see note below regarding calculations)

1. Transocean (RIG): 28.23%
2. Devon Energy (DVN): 15.93%
3. Occidental Petroleum (OXY): 15.39%
4. Suncor Energy (SU): 10.64%
5. Cabot Oil & Gas (COG): 9.85%
6. Questar (STR): 8.13%
7. Chesapeake Energy (CHK): 4.64%
8. Forest Oil (FST): 4.54%
9. Anadarko Petroleum (APC): 2.65%
   

Boone Pickens has had a rough patch here over the past year, but we'll continue to check in on this energy maverick to see what he's up to. As you can see, he has quite a concentrated portfolio full of energy names with Transocean (RIG) as his top position by a wide margin even after he sold off almost a third of his stake. If you go back before his funds 'blew up,' you'll see that Boone held many of these exact energy names and has favored them over the longer-term. He is obviously a big bull on crude oil and natural gas long-term and has positioned his equity portfolio as such.

He started a brand new position in Forest Oil (FST) with 260,000 shares and then he boosted his Cabot stake by 37.5% and boosted his Questar position by 40%. In terms of partial sales, he only sold off some RIG and that's it. However, in terms of full sales, he sold completely out of a bevy of names listed above in the 'removed' paragraph. Other than that, the rest of his positions were flat on a quarter by quarter basis as he left them unchanged.

*Note regarding portfolio percentages: Assets from the collective holdings reported to the SEC via 13F filing were $85 million this quarter compared to $93 million last quarter. 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. In reality, the percentages are more watered down in their actual hedge fund portfolio. If you were to calculate percentage weightings in the actual hedge fund portfolio, they would obviously be different since you would divide position sizes by their total assets under management.

This is just one of the 40+ prominent funds that we'll be covering in our Q2 2009 hedge fund portfolio series. So far, we've already covered the holdings of Bill Ackman's Pershing Square Capital Management, David Einhorn's Greenlight Capital, Seth Klarman's Baupost Group, Dan Loeb's Third Point LLC, and Stephen Mandel's Lone Pine Capital, George Soros (Soros Fund Management), Lee Ainslie's Maverick Capital, Philip Falcone's Harbinger Capital Partners, David Stemerman's Conatus Capital, Eric Mindich's Eton Park Capital, John Griffin's Blue Ridge Capital, and Thomas Steyer's Farallon Capital. Check back each day as we cover prominent hedge fund portfolios.

Gold Technical Analysis Update

Here's a new gold technical analysis video that updates the market outlook. Gold has been in massive uptrend over the past 8 years where it has started to encounter resistance from 2008 until now around the $1000 range. And as of right now, it has hit $1005. We've touched on this before, highlighting that gold has both a psychological and technical resistance area there which it has now overcome. Technical analysis typically dictates that when a certain level is tested on the chart over and over, the more likely it becomes that the level will be broken the next time around. And, that's just what happened. What is key now is if can remain above that level as it will inevitably test it again to verify that past resistance has become future support.

The guys at MarketClub are targeting a price of $1200 for gold based on what the technicals are saying. While the market has been building momentum and they point out the MACD turning up, they are questioning what the catalyst will be in order to send gold truly skyrocketing. But, for the mean time, gold has at least crossed the barrier. You can watch the video on gold here.

(click to enlarge)

James Pallotta's Raptor Capital Cuts BigString (BSGC) Stake In Half (13G Filing)

James Pallotta's hedge fund Raptor Capital Management recently filed an amended 13G with regards to their position in BigString (BSGC). Shares of BSGC are traded over the counter and Raptor has disclosed a 3.35% ownership stake in the company with 2,006,780 shares. The amended filing was made due to activity on August 18th, 2009. This is way down from their previous ownership of 7.12% with 4,004,288 shares. So, they have sold over half of their position.

They had previously filed the original 13G back on January 1st, 2009 as Raptor as a firm was just getting started. Remember that James Pallotta used to head the equities team at Paul Tudor Jones' Tudor Investment Corp. Pallotta then spun-off Raptor as its own fund. However, back in June, we learned that Raptor would be winding down. For the rationale behind the move, Pallotta said, "I intend to step back from day-to-day investing for a few months to spend valuable time crafting an optimal investment strategy in order to capitalize fully on the next several years' developing investment opportunity set." We'll keep an eye out for Raptor's revival or possibly a new entity. You can view some of Raptor's prior holdings here.

Taken from Google Finance, BigString is "is a technology company focused on providing online communications. The Company provides a technology that would allow the user of e-mail services to have control, security and privacy relating to the e-mail generated by the user. In addition to its free e-mail service product, it offers e-mail services, products and applications, such as domain/vanity names, post office protocol version 3 (POP3) e-mail client access (a protocol used to retrieve e-mail from a mail server), advanced e-mail management and campaign management tools, which are offered in several different packages by the users of its BigString e-mail service."

Whitney Tilson's August Letter

Hat tip to MyInvestingNotebook for this. Here's an excerpt of the August 2009 letter from Whitney Tilson of hedge fund T2 Partners:

"We are bottoms-up stock pickers, but an important lesson we’ve learned from this downturn is the importance of factoring in our macro views when determining the fund’s overall positioning. Historically, we were roughly 100% long and 20% short, but when we became convinced early last year that the U.S. housing market was going to collapse, we tripled our short exposure, which is why we ended the year down less than half of the S&P 500. Down 18.1% means you only need to be up 22.1% to get back to even, whereas the S&P, which fell 37.0%, needs to rise 58.7% to do so.

We don’t know for sure what the future holds for the U.S. housing market, economy and stock market, but our best guess is that housing prices will continue to decline for another year – the recent signs of stabilization are likely due to seasonal and other temporary factors – and, overall, the U.S. economy will face a significant headwind for a number of years as losses stemming from the greatest asset bubble in history continue to be realized. Thus, whereas normal economic growth might be 2-3% annually, our base case scenario is approximately 1% for the next 3-5 years. Such low growth is not a catastrophe – it was only six months ago that we stood on the precipice of Armageddon, the chance of which has receded materially, thank goodness – but it will likely keep a lid on corporate profits and the stock market.

...

In addition to reducing our long exposure, we have become more defensive in terms of the nature of the stocks we own. We have trimmed more aggressive positions like Huntsman, Resource America, Crosstex and Borders Group as they’ve rallied, and added a number of blue-chip, cash- rich stalwarts to complement our Berkshire Hathaway position, including eBay, GE, Microsoft, Pfizer and Yahoo."


For some additional thoughts from Tilson, check out his take on Berkshire Hathaway as well.

Certified Hedge Fund Professional (CHP): 14 Spots Left

In the past, we've provided updates regarding the Chartered Hedge Fund Associate (CHA) designation. And, we've even secured an exclusive $50 discount for MarketFolly readers. Today we're here to update you that the CHA is now known as the Certified Hedge Fund Professional (CHP). They have rebranded the certification because they have expanded participation from 200 associates each session to 350 professionals in order to accommodate the large amount of hedge fund managers and senior traders signing up for the program. The program still has all the same benefits, only the name has changed. Additionally, to celebrate the rebranding, they've added free workbooks, educational videos, and access to all the networking events. Best of all, Market Folly readers can still get the exclusive $50 discount by entering their information below! There are only 14 spots left for this session so act quickly if you're interested.

The CHP is like the CFA or CAIA except that it focuses exclusively on hedge funds. It is a great tool to expand your knowledge, further your certification, and make yourself stand out from the crowd if you're applying for jobs. Not to mention, it's a great networking tool. (You can read more about it here). We highly recommend it and you can read numerous testimonials here. Participants include hedge fund managers, traders, analysts, financial advisors, asset managers, consultants, students, and more.

Don't worry, you can still receive the Market Folly discount on any of the old sign-up forms as well as the one below. But remember, you have to enter your information through our form in order to receive the exclusive discount. There's only 14 spots left so hurry before the window closes. The CHA is now the CHP.



(RSS & Email readers: You'll have to come to the blog to sign-up).

What a Short Squeeze Feels Like (Video)

Going into the holiday weekend, we thought we'd post up two fun Friday videos that we are going to call, "what a short squeeze feels like." Don't worry, both videos are work safe. (Email readers make sure you come to the blog to view the videos).

Firstly, here's what it feels like to be squeezed as a short:





Secondly, here's what it's like when you're not the one being squeezed. Instead, in this video you're riding the waves of those shorts who are getting their faces ripped off below you:







Oh, and for those of your curious/puzzled/in denial: yes, the second video is fake. It was edited together and used in a Microsoft Germany advertisement and you can read more about their viral marketing video at Tech Ticker here. Remember that US markets are closed on Monday (Sept. 7th) so have a non-laborious Labor day!

Overcoming Madoff In Fund Management

A few weeks back, we bought you a guest post entitled, 'The Future of Hedge Funds.' Dwelling somewhat along the same lines of that topic, we have another guest post today for you examining how funds will overcome the sour taste Bernie Madoff and his ponzi scheme has left in investors mouths.

Below is a guest post by Elizabeth Harrin of TheGlassHammer.com, an "award-winning blog and online community created for women executives in finance, law, technology and big business."

“We have definitely seen a deterioration in potential investors because of Mr. Madoff’s activities,” says Tonya Powell, Principal at ELP Capital, Inc, investment company which specializes in real estate-secured assets. “The biggest issue is trust, and the almost automatic assumption created by the media that all fund managers may have participated in the same kind of activities.”

Judi Snyder, Partner at JP Snyder, Inc, a boutique financial planning firm, agrees. “Previously, people blindly trusted advisors and didn’t do their own research. This blind trust led to much of the current economic and investor climate.”

Both women’s firms are using multi-pronged approaches to win back consumer confidence. “There’s a fundamental shift – clients are demanding more education,” says Snyder. “I believe, however, Wall Street doesn’t necessarily want people to be educated.” This is a problem that Snyder’s firm is tackling head-on. “We give our clients homework,” she says. “We want them to do research, become educated and ask questions. We want them to take as long as they need to be comfortable with the investment options that we recommend.”

Communication is Key

To educate your clients you have to talk to them. “Even if the news is bad news, investors appreciate hearing from you,” says Nevada-based Powell. “We have done and will continue to conduct a series of webinars on our portfolio and consistent updates via mail and email so that everyone feels included. In addition, our CEO has literally been going through each and every investor with a personal call. Just hearing his voice has helped calm and reassure nearly every person.”

Powell advises that fund managers need to work out in the open. “Don’t hide,” she says. “Even though it may be easier to not want to take calls, answer emails, etc, if investors feel you are avoiding them, they will become even more nervous and potentially angry. Take their calls, answer their questions, pass along all news to them as best you can. By stepping up, assuming responsibility for that which you can, but also making sure boundaries are understood where you cannot fix the situation; it helps to create a much more friendly and smoother relationship between your company and your clients.” She also suggests that if investors want to meet face to face at the office and look through files for example, that this option – and anything else you can think of – is made available to them.

On the other side of the United States, in Florida, the story is the same. “Education and communication are the keys to helping the public better understand free market capitalism,” says Snyder, whose company is based out of Tampa.

Investors Must Do Their Homework

Snyder also believes that due diligence for investors is the way forward. “As an investor, if you don’t conduct due diligence, you are putting your life decisions into the hands of other people,” she says. “It takes time and work. We’ve seen the public adopt a victim mentality when they are let down by their advisors or when their investments perform poorly.” Snyder uses the example of someone buying a car to illustrate her point: “Most people do internet research to find the best car to buy,” she says. “A number of ‘consumer reports’ are likely to pop up. Most of the time, however, these studies are not independent, but are sponsored by an organization with a vested interest in the outcome – such as a particular auto manufacturer. The same holds true for financial instruments and strategies.” If potential clients don’t turn to the internet they might look to well-known media sources for information. “It is essential to take an objective look at who the advertisers and sponsors are behind these media giants,” adds Snyder, “and determine if there is an underlying slant or bias toward particular types of investments.”

With confidence in the financial markets at a low, now might not be the time to point out that investors who didn’t do their homework partly have themselves to blame. Powell believes that fund managers are also facing a challenge convincing clients that the firms are entitled to stay in the black when investors themselves may find themselves in financial difficulties. “It is both acceptable and right that a fund management company can and should continue to make money,” she says, “even if the clients have lost a portion of their portfolio.”

“Corporations are not the Godzilla-like monsters people often portray them as,” says Snyder. “They exist to provide goods and services to the world while making a profit. That is capitalism 101. The bottom-line is businesses keep people employed. If you vilify corporate profit – companies will be forced to shut down or move off-shore.”

Snyder advises that corporations should remind the public that they are made up of individual people: the CEO at ELP Capital calling every investor is a good example of this – it’s the human touch. “These people have names, faces and families,” says Snyder. “They are no different than anyone else. Each and every person has the right to make a living. Just as each corporation has the right to make a profit. Profits keep companies going during tough times, pay for research, help launch new products and services and keep the economy humming.” She recalls Citgo’s recent ad campaign. “It successfully focused on locally-owned retailers,” she explains. “By featuring these entrepreneurs in the campaign, it effectively tells the Citgo story by linking the corporation to every day people. These workers have a family, are supporting grandparents and putting kids through college.”

It’s a difficult message, but getting it across to the investor on the street is key to undoing some of the damage done since Madoff. “If there is no company to oversee their investments, then how do they expect to make any of their principal back?” asks Powell. “Hurting the company only hurts themselves, especially if it is small firm such as ours.”

The above was a guest post by Elizabeth Harrin of TheGlassHammer.com, an "award-winning blog and online community created for women executives in finance, law, technology and big business." Thanks to Elizabeth and the Glass Hammer team for a great piece and head's up on their blossoming community. Make sure to check out the earlier piece, The Future of Hedge Funds and to check out their community as well.

What We're Reading 9/4/09

REITs racing to bankruptcy [Contrarian Profits]

Insider selling hits new highs, buying still non-existent [Pragmatic Capitalist]

Summary of sentiment data for the stock market [Trader's Narrative]

The value of the investment process [zero hedge]

2 part interview with hedge fund manager Joe Ponzio [Simoleon Sense]

Current market move is third biggest PE multiple expansion recorded in shortest time [zero hedge]

Henry Paulson's longest night [Vanity Fair]

Market Folly Custom Portfolio Rebalanced & August 2009 Performance

We're posting up two quick updates regarding our Market Folly custom portfolio. To those of you newer to the portfolio, it is simply a clone designed to mimic hedge fund holdings created with the help of a great replication tool, Alphaclone. Through hours of clone creation and experimentation, we've used our expertise in tracking hedge fund SEC filings to determine an ideal mix of hedge funds and strategies to create a winning portfolio. We wanted to post up an update to let everyone know that the latest rebalance of our portfolio has just occurred. So right now is the ideal time to head over to Alphaclone to see which positions our portfolio is invested in since everything is fresh. And, you can invest right alongside our portfolio that is seeing 20.5% annualized returns. Our portfolio rebalances four times a year (once each quarter after the new SEC filings come out).

Secondly, since we're posting monthly performance updates of our clone for complete transparency, we wanted to update our August 2009 performance figures.

August 2009

MF clone: -1.5%
S&P 500: +3.6%

Year-to-date 2009

MF clone: +9%
S&P 500: +12.4%

Obviously we've hit some rough water lately as our 50% portfolio hedge has weighed on the clone's overall performance. We put the hedge in place due to the fact that we think we aren't out of the woods yet and that there is a possibility of further downside to come. Additionally, we wanted to run a truly hedged portfolio like a hedge fund in the 'old school' sense of the definition. While the portfolio is underperforming in the near-term, we think this is the right decision and we will be quick to point to the clone's long term outperformance.

(click to enlarge)

After all, we created the portfolio with the goal of generating solid returns over the long haul. Since 2000, our clone has seen a total return of 515% versus the S&P return of -18.4%. The outperformance there is uncanny. Not to mention, the MF portfolio is seeing 20.5% annualized returns compared to -2.1% annualized returns for the S&P. Again, no contest. Our Sharpe Ratio comes in at 0.8 while the S&P's comes in at -0.4. Admittedly, our clone's performance comes with more volatility than the S&P due to it's concentrated nature. However, with Alpha of 16.8, we aren't going to complain.

For more background on our Market Folly custom portfolio, check out our introduction in part 1 here and part 2 here. Those posts go on to explain the hedge funds we've selected for our clone, the strategy used, and the performance it has been able to generate. Now head over to Alphaclone to see our Market Folly portfolio's latest holdings after the rebalance and to check out all the performance metrics and data.

Thomas Steyer's Farallon Capital Fancies Capitalsource (CSE): 13F Filing

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

Today we're covering Thomas Steyer's hedge fund Farallon Capital Management. Founded by Steyer in 1986, Farallon employs risk arbitrage strategies. Previously, he was an analyst for Morgan Stanley in their Mergers & Acquisitions department and also an associate on Goldman Sachs' risk arbitrage desk. Farallon typically invests in equities, debt (public & private), private investments, and real estate. Steyer graduated Summa Cum Laude from Yale University and went on to receive his MBA from Stanford.

Despite their typically solid record, 2008 was a rough year for Farallon as they suspended withdrawals after receiving requests for up to 25% of their main fund's capital. In order to keep hold of investors, they offered no typical management and performance fees but instead shifted to accounting fees. The activity of 2008 landed them in the pool of top 10 asset losers. Nevertheless, they were still ranked third in Alpha's 2008 hedge fund rankings. In terms of recent activity, we posted up when Farallon filed a 13D on Global Gold (GBGD).

The following were Farallon's long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.


Some New Positions (Brand new positions that they initiated in the last quarter):
MSCI (MXB), Apollo Group (APOL), iShares Russell 2000 (IWM) Puts, Oracle (ORCL), Select Sector Financials (XLF) Puts, Qualcomm (QCOM), Moodys (MCO), Metavante Tech (MV), Lucent Technologies DBCV 2.75% 6/1, Arch Capital Group (ACGL), Carrizo Oil & Gas Bond, Sirius Satellite Note 3.250% 10/1, Kendle International Bond, Amdocs (DOX), Con-way (CNW), Solutia (SOA), Interval Leisure (IILG), and CTC Media (CTCM).


Some Increased Positions (A few positions they already owned but added shares to)
Discovery Communications (DISCA): Increased by 82.7%
Freightcar America (RAIL): Increased by 59.1%
America Movil (AMX): Increased by 36.3%
Priceline (PCLN): Increased by 22.2%


Some Reduced Positions (Some positions they sold some shares of)
Pinnacle Entertainment (PNK): Reduced by 98.1% (was previously only a tiny position for them anyways)
Sherwin Williams (SHW): Reduced by 79.4%
Fidelity National (FIS): Reduced by 54%
Mastercard (MA): Reduced by 39.4%
Burlington Northern (BNI): Reduced by 36.9%
Visa (V): Reduced by 28.1%
Capitalsource (CSE): Reduced by 8.2%


Removed Positions (Positions they sold out of completely)
Cablevision (CVC)
The rest of their removed positions were less than 0.25% of their reported holdings each:
Affordable Residential Cmnty Note 7.5% 8/1
D&E Communications (DECC)
Magna Entertainment (MECA)


Top 15 Holdings by percentage of long portfolio as reported on the 13F Filing *(see note below regarding calculations)

1. Capitalsource (CSE): 13.98%
2. Burlington Northern (BNI): 5.22%
3. America Movil (AMX): 5.11%
4. Visa (V): 4.87%
5. Lucent Technologies 2.750% bond: 4.8%
   
6. MSCI (MXB): 4.22
7. Discovery Communications (DISCA): 3.89%
8. Knology (KNOL): 3.84%
9. Apollo Group (APOL): 3.78%
10. iShares Russell 2000 (IWM) Puts: 3.77%
11. Oracle (ORCL): 3.65%
12. Select Sector Financials (XLF) Puts: 3.57%
13. Qualcomm (QCOM): 3.48%
14. Priceline (PCLN): 2.73%
15. Moodys (MCO): 2.66%
    

Interestingly enough, Farallon shares their top position with that of Seth Klarman's Baupost Group. Both hedge funds have Capitalsource (CSE) reported as their top holding via the 13F filing which is intriguing. Clearly these two saw value in the company when shares were down big and they both continue to hold this name.

It is also interesting to see Farallon start a brand new position in Moodys (MCO) given that Warren Buffett has sold some shares of his position and David Einhorn (Greenlight Capital) has been short MCO (unknown whether he is still short though) citing a balance sheet with negative shareholder equity and declining relevance in an environment where regulation is anticipated to rise. This just goes to show that there is always two sides to the story and even prominent investors disagree on various positions.

America Movil (AMX) is another position worth pointing out as it sits in third position in Farallon's portfolio. Numerous 'Tiger Cub' hedge funds have had a stake in this name previously. However, many of them sold out of the position, except for Stephen Mandel's Lone Pine Capital who still holds a big stake. Farallon also holds Tiger Cub fund favorites Visa (V) and Mastercard (MA). However, Farallon was out selling part of their position over the past quarter.

Other notable sales include them completely selling out of Cablevision (CVC) which was previously almost 4.5% of their reportable assets on the 13F last time around. They sold off a third of their #2 reported holding, Burlington Northern (BNI) which was interesting. This of course is a long-time Warren Buffett favorite play. They also sold a decent chunk of their Sherwin Williams (SHW) position. In terms of additions, Farallon came close to doubling down on their Discovery Communications (DISCA) stake which we took note of because this stock is widely held by many hedge funds.

*Note regarding portfolio percentages: Assets from the collective holdings reported to the SEC via 13F filing were $1 billion this quarter compared to $494 million last quarter, so they more than doubled their assets invested in long US equities, notes, and options. 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. In reality, the percentages are more watered down in their actual hedge fund portfolio. If you were to calculate percentage weightings in the actual hedge fund portfolio, they would obviously be different since you would divide position sizes by their total assets under management.

This is just one of the 40+ prominent funds that we'll be covering in our Q2 2009 hedge fund portfolio series. So far, we've already covered the holdings of Bill Ackman's Pershing Square Capital Management, David Einhorn's Greenlight Capital, Seth Klarman's Baupost Group, Dan Loeb's Third Point LLC, and Stephen Mandel's Lone Pine Capital, George Soros (Soros Fund Management), Lee Ainslie's Maverick Capital, Philip Falcone's Harbinger Capital Partners, David Stemerman's Conatus Capital, Eric Mindich's Eton Park Capital, and John Griffin's Blue Ridge Capital. Check back each day as we cover prominent hedge fund portfolios.

Top 25 Warren Buffett Quotes

When reading Berkshire Hathaway's annual letters or hearing him speak, one can always take away a few great quotes from value investor extraordinaire Warren Buffett. It should come as no surprise that he is so good at dishing out words of wisdom. After all, he is known as the Oracle of Omaha. We thought it would be prudent to assemble some of his best advice in one cohesive post.

In no particular order, here are 25 insightful investment sayings from legendary investor Warren Buffett:


1. "Rule No.1: Never lose money. Rule No.2: Never forget rule No.1"

2. "In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond."

3. "The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable."

4. "Be fearful when others are greedy. Be greedy when others are fearful."

5. "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

6. "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."

7. “You only find out who is swimming naked when the tide goes out.”

8. "Risk comes from not knowing what you're doing."

9. "If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that."

10. "Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down."

11. "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."

12. "Price is what you pay. Value is what you get."

13. "I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over."

14. "If a business does well, the stock eventually follows."

15. "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

16. "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well."

17. "The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands."

18. "Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."

19. "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."

20. "Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid."

21. "I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out."

22. "We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely."

23. "In the business world, the rearview mirror is always clearer than the windshield."

24. "The investor of today does not profit from yesterday's growth."

25. "Someone's sitting in the shade today because someone planted a tree a long time ago."


Great investing advice as always from Warren Buffett. And, in spirit of the market crisis, we wanted to toss this nice bonus quote in as well: "When you combine ignorance and leverage, you get some pretty interesting results. " Some of the investment banks (and even Warren himself) should have listened to that sound advice.

To learn more about Buffett and his investing ways, we highly recommend perusing the following reads:

- The Essays of Warren Buffett by the Oracle himself: Lessons from Warren Buffett over the years.

- The Warren Buffett Way by Robert Hagstrom: Outline of Buffett's tenets for investing.

- The Intelligent Investor by Benjamin Graham. If you had to own one book about value investing, this would most likely be it. Benjamin Graham was a legendary investor who helped pioneer the ways of value investing and taught Warren Buffett a lot of what he knows today.

- Security Analysis by Graham & Dodd (a staple on our fundamentals recommended list): Hands down THE book on fundamental analysis. Also authored by Buffett's mentor.

- The Snowball: Warren Buffett and the Business of Life by Alice Schroeder. She was hand picked by Buffett to be his biographer.

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As far as our coverage on Buffett goes, we touched on some of his recent moves in our hedge fund / market guru update. Additionally, we covered Berkshire Hathaway's Annual Report. We'll continue to track the Oracle of Omaha's latest moves so stay tuned for future updates.

Bill Gross September 2009 Commentary (PIMCO)

Here's the latest commentary from PIMCO's bond boss, Bill Gross. He entitles it, "On the 'course' to a new normal." In addition to the text below, you can also download it in .pdf version here.

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From PIMCO:

Analyzing why people play golf is like exploring the intricacies of string theory – there are so many permutations lacking scientific observation that physicists or golfers can pretty darn well say anything they like and the explanation might stick. When it comes to whacking that little white ball, the possibilities are nearly endless: People play to relax, to be with friends, to get close to Mother Nature, to enhance business connections, to compete and excel. Gosh, I don’t know, the Zen explanation for why we play golf could even resemble the old saw about climbing a mountain: People golf because it’s there. Whatever the reason, it is the most frustrating, damnable game ever conceived – alternately elevating and depressing you within the span of mere minutes. I love golf. No, I hate it.

Personally, the reason that golf draws me to its intricate web of psychological entrapment is epitomized by a simple six-inch trophy: a chartreuse ball resting on top of its ebony base, preening on a bookshelf in the family room at our desert home. Its inscription reads, “Hole in one, March 15^th, 1990, 14^th hole Desert Course, 155 yards.” Well and good, I suppose – the ace of my life – except it wasn’t. It was the ace of my wife. Above the inscription rests the name Sue – not Bill – Gross. It was a great shot but it wasn’t my shot, and I guess therein lies the explanation for why I continue to tee it up.

Actually, two years ago I did tee it up in the sweltering 105° June heat of the Palm Springs desert. No one, of course, was crazy enough to be with me including my “ace” role model wife who was sipping a cool lemonade in the comfort of our air-conditioned home. Now, there is an “unwritten” rule in golf that in order to be official, a hole-in-one has to be witnessed, and that you have to play a full 18 holes. Otherwise, I suppose, you could stand on the tee with a bucket of balls and hit hundreds or thousands until one of the little guys went in – whatever. The fact is, on this particular day, I was playing only one ball, but I was alone, and – good God! – it went in! The trophy with ebony base and spanking white Titleist ball would read: “Hole in one, June 7^th, 2007, 17^th hole, Mountain Course, 139 yards.” Or was it? Does a falling tree make a sound in the middle of a forest if no one’s there? Is a hole-in-one a hole-in-one if no one else saw it? I say emphatically – yes! That damn ball went in and later that day Sue agreed with me (although she had a funny look in her eye – especially since she didn’t know a thing about the rules of golf). No one else though. No one else agrees with me. Not a soul. I suspect they’re jealous and, in fact, I’ve seen a few of them hitting buckets of balls at dusk from that very same tee when they think nobody’s looking. I’m watching, though, which brings up a funny question. If they sunk one, would theirs be a hole-in-one because I was a witness? Like I said – a damnable game.

“Is a hole-in-one a hole-in-one” may not strike you as the most critical question of the hour, and I would readily agree. “Will we have a New Normal global economy (and investment market)?” would probably usurp it on even Tiger Woods’s top ten list. This “new” vs. “old” normal dichotomy was perhaps best contrasted by Barton Biggs, as I heard him on Bloomberg Radio in early 2009, when he said he was a “child of the bull market.” I thought that was a brilliant phrase, and Barton is a brilliant phrase-maker. He went on to say though, that his point was that for as long as he’s been in the business – and that’s a long time – it has paid to buy the dips, because markets, economies, profits, and assets always rebounded and went to higher levels. That is not only the way that he learned it, but that is the way, basically, that capitalism is supposed to work. Economies grow, profits grow, just like children do. I think that’s why he said he was a child of the bull market, not just because he had experienced it for so long, but also because economic growth and higher asset prices are almost invariably a natural evolution, much like the maturation of a person. That’s how people grow, and so I think Barton was saying that capitalism just grows that way too.

Well, the surprise is that there’s been a significant break in that growth pattern, because of delevering, deglobalization, and reregulation. All of those three in combination, to us at PIMCO, means that if you are a child of the bull market, it’s time to grow up and become a chastened adult; it’s time to recognize that things have changed and that they will continue to change for the next – yes, the next 10 years and maybe even the next 20 years. We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.

This focus on the DDRs – delevering, deglobalization, and reregulation – may be conceptually understandable, but nevertheless still a little hard to get one’s arms around. Why would they necessarily lead to a new, slower growth normal? A little easier to grasp might be the following approach, which feeds off the same concept, but which extends it a little further by suggesting that DD and R lead to a number of broken business or economic models that may forever change the world we once knew and make even Barton Biggs a chastened adult. They are as follows:

1. American-style capitalism and the making of paper instead of things. Inherent in the “great moderation” of the past 25 years was the acceptance of a sort of reverse mercantilism. America would consume, then print paper assets and debt in order to pay for it. Developing (and many developed) countries would make things, and accept America’s securities in return. This game is over, and unless developing countries (China, Brazil) step up and generate a consumer ethic of their own, the world will grow at a slower pace.
   
2. Private vs. public-driven growth. The invisible hand of free enterprise is being replaced by the visible fist of government, a temporarily necessary, but (if permanent) damnable condition itself in terms of future growth and profits. The once successful “shadow banking system” is being regulated and delevered. Perhaps a fabled “110-pound weakling” may be an exaggeration of where our financial system is headed, but rest assured it will not be looking like Charles Atlas anytime soon. Prepare to have sand kicked in your face, if you believe you are a “child of the bull market!”
   
3. Global economic leadership. It’s premature to award the 21st century to the Chinese as opposed to the United States, but if the last six months have been any example, China is sort of lookin’ like Muhammad Ali standing over Sonny Liston in 1964 yelling, “Get up, you big ugly bear!” Not only has China spent three times the amount of money (relative to GDP) to revive its economy, but it has managed to grow at a “near normal” 8% pace vs. our “big R” recessionary numbers. Its equity market, while volatile and lightly regulated, has almost doubled in twelve months, making ours look like that ugly bear instead of a raging bull.
   
4. United States housing and employment. Old normal housing models in the U.S. encouraged home ownership, eventually peaking at 69% of households as shown in Chart 1. Subsidized and tax-deductible mortgage interest rates as well as a “see no evil – speak no evil” regulatory response to government Agencies FNMA and FHLMC promoted a long-term housing boom and now a significant housing bust. Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65% as opposed to 69% of American households.
   
   Similarly, the financialization of assets via the shadow banking system led to an American era of consumerism because debt was available, interest rates were low, and the livin’ became easy. Savings rates plunged from 10% to -1%, as many (if not most) assumed there was no reason to save – the second mortgage would pay for everything. Now things have perhaps irreversibly changed. Savings rates are headed up, consumer spending growth rates moving down. Get ready for the New Normal.

I could go on, reintroducing the negatives of an aging boomer society not just in the U.S., but worldwide. Increased health care may be GDP positive, but it’s only a plus from a “broken window” point of view. Far better to have a younger, healthier society than to spend trillions fixing up an aging, increasingly overweight and diabetic one. Same thing goes for energy. Far easier and more profitable to pump oil out of the Yates Field in Texas or even Prudhoe Bay than to spend trillions on a new “green” society. Our world, and the world’s world, is changing significantly, leading to slower growth accompanied by a redefined public/private partnership.

The investment implications of this New Normal evolution cannot easily be modeled econometrically, quantitatively, or statistically. The applicable word in New Normal is, of course, “new.” The successful investor during this transition will be one with common sense and importantly the powers of intuition, observation, and the willingness to accept uncertain outcomes. As of now, PIMCO observes that the highest probabilities favor the following strategic conclusions:

1. Global policy rates will remain low for extended periods of time.
2. The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
3. Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.
4. Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
5. The dollar is vulnerable on a long-term basis.

Like playing in an Open Championship, future golfers/investors need to play conservatively and avoid critical mistakes. An “even par” scorecard (plus some hard earned alpha) may be enough to hoist the trophy in a New Normal world. Holes-in-one? Maybe if you’re lucky. But make sure someone’s watching, and that their eyes are focused on the New Normal. As for golf, even Sue, my only supporter, has asked me to move my ball, on its own ebony base, away from her more authentic and perhaps the still solitary ace made by Gross family golfers. What a damnable condition.

William H. Gross
Managing Director

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Make sure to also check out Bill Gross' August commentary as well if you're interested.

Nasdaq Bumps Into Resistance At Fibonacci Retracement

The guys over at MarketClub have done some more technical analysis on the Nasdaq chart and are looking closely at a possible shift in the Nasdaq here by using Fibonacci retracements. They believe that index is in a secular bear market and you can watch the Nasdaq video update here. Using Fibonacci retracements from the high in October of 2007 to the low in March of 2009, the retracement levels start to tell us something. Currently, we've encountered the 50% retracement which could potentially be a problem. The Nasdaq has already reversed after bumping into this level once so it looks like some solid resistance there. They also point out a slight divergence where the MACD turned down (negative) early while the Nasdaq continued higher. These divergences are typically early warning signs and are another reason to get cautious here. It's still too early to say whether this is a big reversal and start of a new trend, but things aren't necessarily looking rosy right now. Check out their analysis in their video update on Nasdaq fibonacci retracements.

John Griffin's Blue Ridge Capital Loves Apple (AAPL): 13F Filing

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

Next up is John Griffin's hedge fund Blue Ridge Capital. Griffin is very similar to Stephen Mandel (whom we also just covered) in that they were both some of Julian Robertson's top men at legendary hedge fund Tiger Management. They both went on to form their own funds and as such are labeled 'Tiger Cubs.' Griffin is most well known for his status as Robertson's former right hand man and he clearly knows what he's doing. Prior to that, he received his bachelor's degree from the University of Virginia and his MBA from Stanford. For more on Griffin you can check out our post of Tiger Cub biographies. Blue Ridge invests in companies that dominate their industries and shorts companies with fundamental problems in order to seek absolute returns. Griffin likes to hedge with an effective amount of both long and short positions like a hedge fund in the true sense of the definition.

For more on how to think and analyze like Griffin and Blue Ridge, check out their recommended reading lists. They've laid out their top reads in four categories presented below:

- Behavioral Finance recommendations
- Analytical recommendations
- Economics recommendations
- Historical/Biographical recommendations

Definitely check those out as there are some great suggestions from Blue Ridge in there to help you analyze financial markets and think like a prominent hedge fund manager such as John Griffin.

The following were Blue Ridge's long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.


Some New Positions (Brand new positions that they initiated in the last quarter from largest to smallest):
Pfizer (PFE), CME Group (CME), Schering Plough (SGP), Vale (VALE), Western Union (WU), State Street (STT), iShares Silver Trust (SLV), Express Scripts (ESRX), Partnerre (PRE), VMWare (VMW), Palm (PALM), Interoil (IOC), Wells Fargo (WFC), Redwood (RWT), Direxion 3x bear financials (FAZ), & American Capital (ACAS)


Some Increased Positions (A few positions they already owned but added shares to)
Blackrock (BLK): Increased by 100%
Range Resources (RRC): Increased by 89.4%
Apple (AAPL): Increased by 75.65%
Axis Capital Holdings (AXS): Increased by 38.7%
ThermoFisher Scientific (TMO): Increased by 23.5%


Some Reduced Positions (Some positions they sold some shares of)
Microsoft (MSFT): Reduced by 64.4%
Monsanto (MON): Reduced by 61.8%
Mastercard (MA): Reduced by 61%
Yamana Gold (AUY): Reduced by 54.3%
Newmont Mining (NEM): Reduced by 42.4%
National Oilwell Varco (NOV): Reduced by 41.1%
RenaissanceRe (RNR): Reduced by 34.4%
Amazon (AMZN): Reduced by 34.2%
Goldcorp (GG): Reduced by 33.2%
Berkshire Hathaway (BRK-A): Reduced by 31%


Removed Positions (Positions they sold out of completely)
SPDR S&P 500 (SPY) Calls, Vale (RIO), Amgen (AMGN), Target (TGT), Vornado Realty (VNO), Petroleo Brasileiro (PBR), Google (GOOG), Dell (DELL), Anadarko Petroleum (APC), Devon (DVN), Packaging Corp (PKG), iShares Biotech (IBB), Fomento Economico (FMX), Goodrich Petroleum (GDP), Calpine (CPN), Vimpelcomm (VIP). It also shows them selling out of General Growth Properties (GGWPQ), but this is only because the SEC has deemed it not necessary to report holdings in those shares anymore. (We touched on this when we covered Bill Ackman's portfolio). We now have no way of knowing if Blue Ridge still hold common shares or not.


Top 15 Holdings by percentage of assets reported on the 13F filing *(see note below)

1. Apple (AAPL): 7.3%
2. Millipore (MIL): 5.4%
3. Pfizer (PFE): 5.2%
4. CME Group (CME): 5.2%
5. ThermoFisher Scientific (TMO): 5.18%
6. Schering Plough (SGP): 4.8%
   
7. Visa (V): 4.7%
8. Microsoft (MSFT): 4.5%
9. Amazon (AMZN): 4.1%
10. Covanta (CVA): 3.73%
11. Vale (VALE): 3.7%
12. National Oilwell Varco (NOV): 3.7%
13. Blackrock (BLK): 3.43%
    
14. Discovery Communications (DISCA): 3.04%
15. Crown Castle (CCI): 2.63%
    

For all you Wall Street (the movie) fans out there, realize that we were very tempted to make the headline, 'Blue Horseshoe loves Apple,' but we refrained due to the fact that it would be a ridiculously bad joke. (Sidenote: the Wall Street sequel is coming for those of you unaware). At any rate, Blue Ridge Capital loaded up on shares of Apple (AAPL) in a big way, increasing their stake by over 75% and bringing it to their top holding. You can bet they're up big on this position as shares of AAPL have risen from $142 to $170 since June 30th when this portfolio snapshot was taken. Earlier this week, we also noted that David Stemerman's Conatus Capital held Apple as their top position. Shares of AAPL were certainly a theme over the past few quarters for many prominent hedge funds.

Blue Ridge also loaded up on shares of CME Group (CME), starting a brand new position and making it their 4th largest holding. Also worth noting is their brand new position of Western Union (WU), which they made their 17th largest holding. We mention this because John Griffin's hedge fund now owns Visa (V), Mastercard (MA), and Western Union (WU) all as top 20 holdings in their portfolio as they play the payment processing theme. While they brought on WU, they also cut their MA stake by 60%.

In terms of notable sales, they completely sold out of their SPDR S&P 500 (SPY) Calls position. That was previously a 5.8% stake for them and you have to believe they profited handsomely from it. From quarter-end to quarter-end (March 30th 'til June 30th), the S&P was up over 12.6%. We also wanted to highlight their 64% reduction in their Microsoft (MSFT) stake and their nearly 62% reduction in their Monsanto (MON) position.

It also appears if Blue Ridge has possibly been playing some risk arbitrage a bit with brand new positions in Pfizer (PFE) and Schering Plough (SGP), but there's no way for us to be sure. We only guess that solely because a ton of hedge funds have been buying shares of companies that are in the midst of some sort of merger or transaction. As the risk arbitrage space has dwindled due to fund redemptions and closures, newer funds have stepped onto the scene to pick up the pieces.

Lastly, we also wanted to highlight other recent activity from Blue Ridge where we see they established a new stake in PennyMac Mortgage (PMT).

*Note regarding portfolio percentages: Assets from the collective holdings reported to the SEC via 13F filing were $3.9 billion this quarter compared to $4.3 billion last quarter, so down slightly. 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. In reality, the percentages are more watered down in their actual hedge fund portfolio. If you were to calculate percentage weightings in the actual hedge fund portfolio, they would obviously be different since you would divide position sizes by their total assets under management.

This is just one of the 40+ prominent funds that we'll be covering in our Q2 2009 hedge fund portfolio series. So far, we've already covered the holdings of Bill Ackman's Pershing Square Capital Management, David Einhorn's Greenlight Capital, Seth Klarman's Baupost Group, Dan Loeb's Third Point LLC, and Stephen Mandel's Lone Pine Capital, George Soros (Soros Fund Management), Lee Ainslie's Maverick Capital, Philip Falcone's Harbinger Capital Partners, David Stemerman's Conatus Capital, and Eric Mindich's Eton Park Capital. Check back each day as we cover prominent hedge fund portfolios.

Explanation of Contract For Difference (CFD) Market

The contract for difference (CFD) market in the UK has grown significantly during the last ten years. In late 2007 the Financial Services Authority estimated that 30% of equity trades in some way involved CFD transactions*. Today, it is highly likely that the figure is even higher.
Many may ask, why use CFDs instead of purchasing the plain vanilla equities directly? One big advantage that CFD holders have in the UK is that they avoid the Stamp Duty of 0.5% that is levied on all equity purchases (but not sales) in companies listed on the London Stock Exchange. Other potential advantages include greater leverage, the ability to go short and, until very recently, anonymity. Anonymity is of course something prized by many hedge funds and large investors as they try to tip-toe around the markets without leaving a massive footprint. Secrecy is the name of the game in hedge fund land. The last thing hedge fund managers want is copy-cat investors jumping in and influencing the share price of a company before they have finished buying or selling. Similarly, hedge funds involved in activism or takeovers can at times be more effective and influential if they can build large shareholdings in the target company without being seen.
However, the Financial Services Authority (FSA), the British equivalent of the SEC in the United States introduced new rules which came into effect on June 1st. These rules now force hedge funds to disclose CFD stakes they had previously built up secretly. The new rules require an investor holding more than 3% of a company’s equity through derivatives to disclose their stakes. Investors that build large shareholdings via a combination of normal shares and CFDs must also disclose their combined position once it crosses the 3% of issued shares threshold.
The new rules produce a more level playing field between stocks and CFDs with regard to disclosure. However, there seems to be at least one loophole in the legislation in that it applies only to interests in UK-headquartered companies but not investors in overseas companies that are listed in London.
Those of you who like to track the best hedge fund managers now have a new way to follow them due to the rule changes. A good example of the extra information we can look forward to in the future is provided by a recent filing from Ken Griffin’s Citadel Advisors LLC. Citadel revealed that they have a large 16% stake in property developer, Songbird Estates via CFDs (see table below).

Songbird Estates Plc (Interest in Ordinary class B shares via contract for difference CFD)

Date company was notified of purchase	No. of shares	% of company’s issued stock
01/06/2009	30940584	16.0
20/08/2009	30797470	15.96

Taken from Google Finance, Songbird Estates plc is "engaged in the management of its investment in its main subsidiary, Canary Wharf Group plc, the holding company for a group that specializes in integrated property development, investment and management focusing particularly on the Canary Wharf Estate, including Heron Quays West, Riverside South and North Quay (the Estate). Canary Wharf Group is also involved through joint ventures in the development of Wood Wharf and the redevelopment of Drapers Gardens. As of December 31, 2008, Canary Wharf Group’s investment portfolio comprised 16 completed properties (out of the 31 constructed on the Estate) totaling 7.9 million square feet net internal area (NIA), of which 99.7% was let. On November 17, 2008, Canary Wharf Group announced that it had concluded an agreement for the staged development of Riverside South with JP Morgan. In December 2008, Canary Wharf Group reached an agreement to commence work on the Crossrail station at Canary Wharf."
This is an expansion of our hedge fund portfolio tracking series to cover holdings in other markets. Thanks to a reader, we are now able to track prominent hedge fund positions in the UK markets. We've previously covered Lone Pine Capital's UK positions and their recent UK movement. Additionally, we've covered Sprott Asset Management's UK positions where we saw them playing defense. We'll continue our coverage in this regard so stay tuned for future updates.


*Financial Services Authority “Disclosure of Contract for Difference: Consultation and draft Handbook text”, Vol 20 No. 20 November 2007.

AQR's Cliff Asness Explains Quant Strategies (Video)

Hat tip to our buddy @StockJockey for flagging this excellent video with Cliff Asness of hedge fund firm AQR Capital Management where he talks quantitative strategies. AQR has recently been also getting into the mutual fund business as they look to diversify their offerings.

Email (& possibly RSS) readers will need to come to the blog to view the embedded video: