2010 Hedge Fund Returns: Performance Numbers From Top Managers

Data from Hedge Fund Research indicates that as a whole, hedge funds returned 10.5% for 2010, lagging the S&P 500 return of 15.06%. Below you'll find specific hedge fund performance from top managers for last year. We'll continually update this post as more numbers roll in.

In general, the month of May was brutal for hedgies, but the majority managed to turn things around by the end of the year. And if you're interested in a year-over-year comparison, head to our posts on 2009 hedge fund returns as well as 2008 returns.

Hedge Fund Returns: 2010

Paulson & Co: +11%. That number pertains to John Paulson's Advantage Fund. The firm saw varied performance last year as its Advantage Plus Fund returned 17%, its Recovery Fund soared 24%, its Gold Fund returned 35%, and its merger arbitrage fund returned 27%.

Also worth highlighting is the fact that the gold share classes of Paulson's funds performed markedly better. The gold share class of the Advantage Fund was up 31% in 2010 (compared to +11% for the normal class). As always, we've showcased an in-depth look at Paulson's gold fund.

Bridgewater Associates: +38%. Ray Dalio's 'zen' approach to an investment firm paid off as they returned one of the higher totals across the hedge fund industry last year.

Renaissance Technologies (Medallion Fund): +30%. Jim Simons' legendary hedge fund continued its epic run of performance in 2010. What's astonishing is that those numbers are net of a 5% management fee and a 44% performance fee (gross performance of the fund would have been around 60%). Back in 2008, Medallion returned an astonishing 80% while markets crumbled.

RenTec's RIFF finished up 22.7% and its RIEF was up 16.5%. We've posted up the Medallion Fund's historical returns before for those interested.

Millennium Management: +13.3%. Israel Englander's firm now manages around $9.1 billion.

Greenlight Capital: +12.5%. We've of course covered David Einhorn's portfolio in-depth on the site. Last year seems to be the first that he's lagged the major market indexes as he took a cautionary stance given economic uncertainty.

SAC Capital: +15%. Steven Cohen's firm was amongst a bevy of other hedge funds that saw returns in the mid-teens.

Pershing Square Capital: +29.7% net. Bill Ackman's hedge fund had a stellar year as a bet on General Growth Properties' (GGP) bankruptcy turnaround paid off. Ackman discusses his portfolio here.

Tudor Investment Corp: +7.5%. Paul Tudor Jones' flagship BVI Global fund was positive for the year but still lagged the markets in general.

Appaloosa Management: +22%. That number is for their Thoroughbred fund. We also posted Tepper's recent interview.

Harbinger Capital Partners: -12%. Phil Falcone's fund had a rough year as they transitioned from their normal strategy to a concentrated bet on 4G.

Glenview Capital: +15.3% net. Here is our coverage of Larry Robbins' portfolio activity.

Moore Capital: +3%. Louis Bacon's flagship Moore Global was up only single digits for 2010, but its macro managers fund returned 105%.

AQR Capital: +27.3%. Cliff Asness' firm saw solid returns last year in its macro strategy.

Third Point: +34%. Dan Loeb's Offshore hedge fund had an impressive year and we've detailed his portfolio throughout the year. He manages around $2 billion.

JANA Partners: +8.4%. Barry Rosenstein's activist and event-driven hedge fund has around $1.9 billion AUM.

Clarium Capital: -23%. Peter Thiel's hedge fund continues to struggle as its long-term predictions face near-term volatility. While Clarium was down single digits in 2008 (and thus beat the market that year), the fund has lost money for three straight years. At last tally, Clarium managed $681 million, way down from its peak of over $7 billion.

Citadel Investment Group: +10%. Ken Griffin's investment firm saw 10% returns in its main Kensington and Wellington funds.

Passport Capital: +18.3%. John Burbank's macro style of investing has been known for its volatile near-term swings but solid long-term performance. We previously posted Passport's market commentary.

Centaurus Energy: -3.8%. Famed energy trader John Arnold suffered his first yearly loss in 2010. Arnold makes large and concentrated bets and has been hampered by regulators imposing position limits.

Xerion Fund (Perella Weinberg Partners): +12.66% net. Dan Arbess' fund manages $2.3 billion and we posted Xerion's 2011 investment outlook.

BlueCrest Capital: +16%. This quant fund turned in better numbers than its multi-strategy fund, which was up 8% or so.

T2 Partners: +10.3% net. Whitney Tilson and Glenn Tongue's hedge fund had a great start to the year but then bled gains as their short positions rallied against them. Here are T2's long and short positions.

Och-Ziff: +8.44%. Performance is for their flagship Master Fund. Their Special Investments Fund was up 13.16% for 2010. The firm manages over $27 billion.

Perry Capital: +14.6%. We talked about one of Richard Perry's latest investments here.

HBK Capital Management: +11.62%. The firm manages $5 billion and is named after the initials of its founder, Harlan B. Korenvaes. He launched the fund back in 1991 with $30 million.



Possibly the most intriguing note about hedge fund returns for 2010 is that a number of big name investors lagged market indices. This includes Ken Griffin (Citadel), Paul Tudor Jones (Tudor Corp), and one of Louis Bacon's funds (Moore Capital). Heading into 2011, we've already seen that hedge funds have reduced equity exposure so it will be interesting to see how they zig and zag through markets this year.

For past returns, head to our posts on 2009 hedge fund performance numbers and 2008 hedge fund returns.


Sources: Anonymous investors/investor letters, Hedge Fund Research, Bloomberg, Institutional Investor, Dealbreaker, Reuters, & HSBC.

Jeff Saut Sees Tactical Bull Market, Still Cautious Near-Term

Raymond James' Chief Investment Strategist, Jeff Saut, is out with his weekly market commentary. As we pointed out last time around, he was cautious but a buyer on dips. His thoughts remain unchanged in this regard. Hedge funds also agree as they've reduced equity exposure.

However, this time around he revealed some interesting thoughts about where he thinks we are in the overall stock market cycle. He points out that according to Dow Theory, this is a bull market. But when asked if it would be tactical or secular, he replies that, "Personally I think it is tactical within the context of the broad trading range we have been experiencing since the turn of the century."

And although he makes this distinction, he can't help but pay attention to the potential warning signs flashing at him. He notices numerous similarities between the current market and the action before the April 2010 market top. As such, he is cautious in the short-term. However, he does not see another 17% decline like last year's drop in May.

Overall, Saut is still a buyer on dips (if they ever come). He is bullish on technology and specifically likes CA (CA), Hewlett-Packard (HPQ), and NII Holdings (NIHD). Additionally in the bank sector, he suggested ideas of Iberiabank (IBKC), Peoples United Financial (PBCT), and Huntington Bancshares (HBAN).

Embedded below is Jeff Saut's latest market commentary:



You can download a .pdf copy here.

For more recent research from this shop, head to the analysts' best stock picks for 2011.

Balyasny Asset Management Buys Willbros Group (WG) Shares

Balyasny Asset Management, the hedge fund firm founded by Dmitry Balyasny, recently filed a 13G with the SEC regarding shares of Willbros Group (WG). Due to portfolio activity on December 21st, 2010, Balyasny has revealed a 5.15% ownership stake in WG with 2,463,491 shares.

This is only a slight increase in their pre-existing position in Willbros Group. Back on September 30th, 2010, the hedge fund firm owned 2,269,197 shares of WG. As such, Balyasny has only boosted its position size by 8.5% over the course of three months, buying 194,294 additional shares.

Nicknamed BAM, Balyasny Asset Management was founded in 2001 by Dmitry Balyasny. Their main office is in Chicago but they have offices around the globe. Their strategy is anchored by fundamental-based research organized by sector. The hedge fund firm seeks to "focus on misunderstood situations and companies/sectors undergoing turbulent change from different perspectives." As noted in our 2009 hedge fund returns post, BAM finished up 8.64% for that year.

Per Google Finance, Willbros Group is "a provider of energy services to global end markets serving the oil and gas, refinery, petrochemical and power industries. Within the global energy market, the Company is engaged in designing, constructing, upgrading and repairing midstream infrastructure, such as pipelines, compressor stations and related facilities for onshore and coastal locations, as well as downstream facilities, such as refineries."

For all our coverage on hedge fund activity, head to our posts on the latest SEC filings.

Soros Fund Management Takes Stake in San Leon Energy (LON: SLE)

George Soros' hedge fund firm, Soros Fund Management, have just disclosed a 22% ownership stake in oil and gas exploration company, San Leon Energy (LON: SLE). Due to trading on January 6th, the hedge fund recently crossed the London Stock Exchange's threshold that requires them to disclose the position.

It is likely that Soros acquired shares via San Leon's £59.6m placement on December 31st, 2010. In total, the hedge fund now owns 176,928,520 voting rights. Soros has also been involved in another oil & gas play as we detailed last month as well. There seems to be a common theme here and it will be interesting to watch for potential further investments. In the past, Soros had been a large owner of Petrobras (PBR), Brazil's state-owned oil play.

Per Google Finance, San Leon Energy Plc is "an oil and gas exploration company. The Company is focused on the exploration and production of oil and gas projects in Italy, Poland, Netherlands, United States and Morocco. SLE enjoyed success in acquiring all five permits it applied for in Italy which comprises of three offshore licenses near Sicily and two onshore in the Po Valley. SLE has worked with ONHYM in Morocco to explore the available and massive oil shale opportunities. The Company’s projects include Talisman Energy, Baltic Basin, Permian Basin South, Permian Basin North, Tarfaya Oil Shale Project, Zag and Tarfaya Licences, and Foum Draa & Sidi Moussa. The Company’s wholly owned subsidiaries consists of San Leon (Morocco) Limited, San Leon (USA) Limited, San Leon (Netherlands) Limited, San Leon Energy Srl, San Leon Services Limited, Gold Point Energy Corp., San Leon Energy USA Inc, San Leon (Poland) SP. Zoo, and Vabush Energy SP. Zoo. In 2009, the Company acquired Gold Point Energy (GPE). "

Be sure to scroll through our coverage of hedge fund activity in UK markets for more.

Bruce Berkowitz Sells General Growth Properties (GGP) Stake to Brookfield (BAM)

Shares of General Growth Properties (GGP) have been a big winner for Bruce Berkowitz's Fairholme Capital (and mutual fund FAIRX). After scooping up debt and shares while the company was in bankruptcy, Berkowitz has profited from the company's emergence from Chapter 11 as shares rebounded from the low single digits to now over $14.

It appears as though Berkowitz has said that now is the time to take some profits off the table. Announced via a press release today, Brookfield Asset Management (also a large GGP investor) has acquired 113.3 million shares of GGP from the Fairholme Fund. This transaction is valued at $1.7 billion and Brookfield's ownership stake in General Growth Properties will rise to 38%. Per GGP's restructuring, Brookfield is limited to owning 45% of GGP at most.

Other large General Growth Properties investors include hedge fund Pershing Square. Bill Ackman's firm helped spearhead the campaign to restructure GGP and ensure its exit from bankruptcy. We've detailed previously that Whitney Tilson's T2 Partners also owns GGP but trimmed its stake as well.

To finance the transaction, Brookfield will use $804 million in cash and will issue 27.5 million shares of Class A stock (BAM). Upon completion, Berkowitz's Fairholme will own a 4.5% equity stake in Brookfield.

Maybe the most interesting note here is that Fairholme is selling its *entire* equity stake in GGP, but it will continue to own warrants. Todd Sullivan over at ValuePlays has an interesting look at why Berkowitz might be doing this. A hint: it relates to St. Joe (JOE), a battleground stock as Berkowitz is long and David Einhorn's Greenlight Capital is short. It's purely speculation, but it's certainly an interesting idea.

What Steve Jobs' Medical Leave Means For Apple Investors (AAPL)

Apple (AAPL) CEO Steve Jobs emailed Apple employees to let them know he would be taking a medical leave of absence. Given that this is one of the largest companies in the world, we figured we'd examine what this means for the company and its investors. After all, according to Goldman Sachs, Apple is the stock that matters most to hedge funds.

Steve's email is posted below:

"Team,

At my request, the board of directors has granted me a medical leave of absence so I can focus on my health. I will continue as CEO and be involved in major strategic decisions for the company.

I have asked Tim Cook to be responsible for all of Apple's day to day operations. I have great confidence that Tim and the rest of the executive management team will do a terrific job executing the exciting plans we have in place for 2011.

I love Apple so much and hope to be back as soon as I can. In the meantime, my family and I would deeply appreciate respect for our privacy. Steve"


Apple's Stock During Past Jobs Absences: A Buying Opportunity?

With this news, the number one question on investors' minds is: buy or sell? The natural expectation is for shares of AAPL to sell-off on this news. After all, that's exactly what happened the last two times Jobs took a medical leave of absence, in 2004 for pancreatic cancer surgery and in 2009 for a liver transplant. And already today, shares of Apple trading in Germany are down 7%.

Jobs' 2004 Absence: AAPL was down around 2% the day of the announcement of his surgery. Shares ended the week down almost 8%. One month later, shares had recovered the losses. One year later? Shares doubled.

Jobs' 2009 Absence: AAPL initially traded down 6% the day news broke that Jobs was leaving but ended the day down 2%. What happened to Apple's stock during the six months Jobs was gone? Up over 66%.

Taking a quick look at the StockTwits stream for AAPL shows that investors are readily expecting a dip in shares on the news again this time around. Yet what you should also take note of is the resounding 'buy the dip' mentality. This is probably most attributable to the fact that so many people witnessed shares eventually rise the last time Apple's CEO had to take some time away.

If you drill down specifics, Jobs' departure does not really have an immediate impact. Tim Cook, the company's COO, will take over operations just as he did last time Jobs stepped away. Cook, known for his operational prowess, will continue to execute the company's roadmap. Consider this: Apple's product pipeline for the entire year is largely already in place. Per Engadget:

- The Verizon (VZ) iPhone was just announced & will be released soon

- iPad 2 is currently in development and is rumored to be released in the early Spring

- The next generation iPhone 5 is also rumored to be in development with a potential summer release

- After that, it makes sense that they develop an iPhone capable of running LTE/4G data speeds

And on top of that, you have the usual refreshes and revamps to iPods, Apple TV, as well as the iMac and Macbook computer lines. The point here is simple: Jobs' absence changes little in terms of product roadmap and 2011 plans.

Yes, obviously the CEO is hugely valuable to the company, but Cook has already proven once that he can handle things while Jobs is gone. Investors have become more familiar with Cook as well as other key figures at the company, including Jonathan Ive of the design team. While Jobs is Apple's figurehead, he is not the only person there.

The largest potential negative of Jobs' temporary departure revolves around his attention to detail and his ability to envision the 'next big thing.' In that sense, he will certainly be missed. The more pressing concern here would be if Jobs extends his temporary absence into a permanent one.


Jobs' Second Medical Leave In Two Years

For investors, there is arguably no one more important to a stock than Steve Jobs. The man IS Apple. He is a visionary and responsible for the company's impressive turnaround over the years. At the same time, he is obviously human.

Back in 2008, the CEO started to noticeably lose weight and rumors started surging that his health was in decline. Apple investors will recall that Jobs previously battled pancreatic cancer. In January 2009, Jobs took a leave of absence and posted a letter about it. He returned about six months later after a liver transplant and the company flourished.

In his two letters (in 2009 and now in 2011) there is one common thread: he is still technically in charge. In 2009 he wrote, "I will continue as Apple's CEO during my recovery." And now in 2011 he writes, "I will continue as CEO and be involved in major strategic decisions for the company." And as we've outlined above, the company's pipeline is largely in place for the rest of the year.

However, a second leave of absence in a few years has to spook investors somewhat. We're not here to speculate as to what might be wrong with Steve. But investors in one of the largest companies in the world will chime in that they deserve the right to know what's going on with the CEO of a public company.

The crux of the situation is that Jobs' departure in the immediate term doesn't hurt Apple. The company rebounded just fine during his last departure. Jobs' absence is most concerning from an investment standpoint if he were to make it permanent. And with each additional medical leave, speculation mounts.


Everybody Loves AAPL Shares

Jobs' health will once again become THE talking point for the stock. Before this news came out, zero sell-side analysts had a 'sell' rating on the company. Zero.

Of all the stocks and hedge funds we cover on MarketFolly.com, Apple is by far and away the most widely owned by hedgies. David Einhorn of Greenlight Capital established his AAPL position way back at $248 per share and he was arguably a late-comer to the AAPL party. So many prominent managers own AAPL as a top holding that we had to create a separate post for the top hedge funds that own Apple.

And already, Goldman Sachs is out defending shares of the company as they anticipate a wave of sellers this morning and in the near-term. They re-iterated keeping AAPL on their Conviction Buy List and buying on any weakness with a 12-month price target of $430. Goldman's Bill Shope outlines their rationale:

"1) The management team remains strong, and we believe investors would embrace Tim Cook in any potential succession plan;

2) Apple's $51 billion in cash and investments could be partially distributed to shareholders to stabilize the shares;

3) The multiple of 15.1X already represents a significant historical discount, and we see no direct risk to earnings from this move."

It should also be noted that Goldman identifies "uncertain management succession plans" as a potential key risk for the future. But in the near-term, it's very clear that they still like shares on any expected weakness. You can read the full Goldman Sachs note on Apple here and can visit our previous post on Goldman identifying AAPL as the most important stock to hedge funds.


What It Means For Investors

Shares of AAPL will undoubtedly have a cloud of uncertainty hanging over them for some time. The same thing happened when Jobs took medical leave in 2009. Investors will also carefully consider that the company is set to report earnings this week as well. Apple often 'sandbags' guidance and then blows out the numbers in its report.

Will the company's earnings be able to overshadow Jobs' departure? It's doubtful, especially when you consider that analysts on the conference call will largely focus on Jobs. And if Apple's past stance on commenting on Jobs' health is any indication, they'll be beyond tight-lipped.

The main takeaway here is that Apple has already survived a Jobs medical leave before and with the company's current product roadmap in place, it can do so again. At the same time, investors rightfully have to be concerned about Jobs' long-term future at the company. His health is the most important thing here and as he stated in his 2009 letter, "I will be the first one to step up and tell our Board of Directors if I can no longer continue to fulfill my duties as Apple's CEO."

In the near term, the company will be fine. It's the long-term that investors have to be concerned about. It will be most intriguing to see what various hedge funds do with their AAPL positions pending this development. A mass exodus by hedge funds could send shares spiraling. After all, it is one of the most widely owned stocks in the market and we've identified the hedge funds that own lots of AAPL in a separate post.

* If you found this article useful, you can find much more analysis on what the top hedge funds are investing in by receiving our free updates via email or via RSS reader.

Top Hedge Funds That Own Apple (AAPL)

Continuing our coverage of Apple (AAPL) today, we present the top hedge funds that own Apple. After all, we've previously highlighted how Apple is the most important stock to hedge funds.

Without further ado, here is the breakdown of the top hedge fund owners of Apple as of September 30th, 2010. This data was taken from the most recent SEC 13F filings. The newest 13F's won't be released for about another month at which point we'll get an updated look as to who owned AAPL at 2010 year-end, so this data should be taken with a grain of salt. Keep in mind that MarketFolly.com will of course be analyzing the latest hedge fund positions in our newsletter, Hedge Fund Wisdom.


Hedge Funds That Own The Most Apple (AAPL):

1. Stephen Mandel's Lone Pine Capital: Owns 0.29% of AAPL (2,707,106 shares)

2. David Shaw's D.E. Shaw Investment Management: 0.26% of AAPL (2.39 million shares)

3. Jim Simons' Renaissance Technologies (RenTec): 0.21% of AAPL (1.96 million shares)

4. Shumway Capital Partners (Chris Shumway): 0.2% of AAPL (1.8 million shares)

5. Rob Citrone's Discovery Capital Management: 0.17% of AAPL (1.5 million shares)

6. Philippe Laffont's Coatue Management: 0.17% of AAPL (1.5 million shares)

7. Lee Ainslie's Maverick Capital: 0.15% of AAPL (1.3 million shares)

8. Chase Coleman's Tiger Global: 0.14% of AAPL (1.25 million shares)

9. John Griffin's Blue Ridge Capital: 0.13% of AAPL (1.22 million shares)

10. David Einhorn's Greenlight Capital: 0.09% of AAPL (837k shares)

11. Kleinheinz Capital Partners (John Kleinheinz): 0.09% of AAPL (782k shares)

12. Ken Griffin's Citadel Investment Group: 0.08% of AAPL (753k shares)

13. David Stemerman's Conatus Capital: 0.08% of AAPL (714k shares)

14. Kingdon Capital Management: 0.08% of AAPL (701k shares)

15. Jeff Vinik's Vinik Asset Management: 0.07% of AAPL (621k shares)


Of the list above, you'll notice an overarching theme: Tiger Cubs. Of the top hedge fund owners of AAPL, seven are 'Tiger Cub' hedge funds. These are funds that employ long/short equity strategies similar to those learned from the respective manager's time working at Julian Robertson's Tiger Management. This strategy focuses on intensive fundamental research and often focuses on value or G.A.R.P. (growth at a reasonable price) investments.

Singling out a few of the other managers on the list above, we previously detailed that Apple is Kleinheinz Capital's top position when we examined their letter to investors. Additionally, in the past we've touched on David Einhorn's rationale for buying Apple as his cost basis is around $248 per share.

Earlier this morning we highlighted Goldman Sachs' research on AAPL where they kept the stock on their Conviction Buy List despite CEO Steve Jobs' medical leave of absence. Additionally, we highlighted in-depth what this means for AAPL investors.

* If you found this article useful, you can find much more analysis on what the top hedge funds are investing in by receiving our free updates via email or via RSS reader.

Goldman Sachs Note on Steve Jobs & Apple (AAPL): Still on Conviction Buy List

Goldman Sachs is out with an updated research note on shares of Apple (AAPL) pending the news that CEO Steve Jobs has taken another medical leave of absence. Today we are focusing on AAPL on the site because according to Goldman, it is the most important stock to hedge funds.

Practically all of the major hedge funds we track have exposure to Apple and for many, it is their top position. We've compiled a list of the top hedge funds that own AAPL here. Combine this with the fact that Steve Jobs IS Apple, you have a potentially volatile situation on your hands. Due to Jobs' medical leave of absence, Goldman expects shares to see near-term weakness. However, they view any dips as a buying opportunity and maintain the stock on their Conviction Buy List.

Goldman's 12-month price target on shares of AAPL is $430. Per the report, "Our target price represents a 19x P/E multiple on our above-consensus CY2010 EPS estimate or a 19% discount to Apple's five-year average multiple of 23x."

Their research essentially outlines 3 reasons that the long-term fundamentals for Apple are still in tact:

1. Tim Cook is a proven leader and step in if Jobs' absence ever became permanent

2. Apple has a massive cash hoard of $51 billion

3. The stock is already trading at a historical discount and Goldman sees no threat to earnings


Embedded below is Goldman Sachs' full research note on Apple (AAPL):



You can download a .pdf copy here.

For more on AAPL, head to our in-depth post on what this means for Apple investors, as well as our summary of the hedge funds that own the most AAPL shares.

Analysts' Best Stock Picks For 2011

Raymond James is out with its Analysts Best Picks for 2011 report. We highlighted their picks from 2010 and those performed pretty well with a 22.3% return. In fact, their annual selections have a 10 year average return of 12.4%.

The report details analysis of the fundamentals, growth prospects and risks associated with each stock. They've selected 13 stocks again this year and in alphabetical order, here are the Analysts' Best Stock Picks for 2011:

- Allscripts Healthcare (MDRX)
- Bank of America (BAC)
- CONSOL Energy (CNX)
- Covidien (COV)
- Digital Realty Trust (DLR)
- Equinix (EQIX)
- Halliburton (HAL)
- HealthSouth (HLS)
- Lincoln National (LNC)
- NVIDIA (NVDA)
- Panera Bread (PNRA)
- Pioneer Natural Resources (PXD)
- Stanley Black & Decker (SWK)

There are some pretty familiar names in that bunch and a few prevalent themes. They've included multiple plays in the health space with MDRX, HLS, and COV. Also, technology is represented with two names in NVDA and EQIX. Also, energy/natural resources are abundant via PXD, CNX and HAL. We wanted to highlight a few of their selections below:

Bank of America (BAC): This name is interesting because it was also on the analysts' best picks list for 2010. However, over the course of last year the stock declined. Raymond James sees the price depreciation as further opportunity and is again a buyer of shares this year. Not to mention, some of the largest hedge funds in the game have sizable stakes in BAC, including John Paulson.

Halliburton (HAL): Arguably, the time to buy this name was during the Gulf oil spill when uncertainty abounded and the stock price was depressed. Yet, RJ feels the company will see near-term earnings momentum and a rebound in international activity. We've talked about how hedge funds are betting on higher oil prices as well.

Equinix (EQIX): This tech name is intriguing because it saw some volatility last year. And as we detailed in our Hedge Fund Wisdom newsletter months ago, a large shareholder (Shumway Capital) was reducing its position size and could be partially responsible for the volatility. Raymond James likes the company's dominant market position in the colocation market and data center industry.


Keep in mind that obviously with the market rally, a lot of these names have been bid up significantly already. Some strategists would obviously advocate waiting to purchase some of these names given that they're extended and knowing that the market doesn't go straight up forever. RJ's Chief Investment Strategist Jeff Saut expects a buyable pullback.

Embedded below is the full research on Analysts' Best Picks for 2011:



You can download a .pdf copy here.

For further research from this shop, head to the previous best stock picks for 2010 as well as Jeff Saut's risk management principles.

What We're Reading ~ 1/14/11

Interview with hedge fund legend Michael Steinhardt [Benzinga]

If you could short Facebook, would you? (read the comments section too) [Reformed Broker]

Eclectica's Hendry bets China will fail [Bloomberg]

We previously covered Hendry's Asian bear portfolio [Market Folly]

Why it's a great time to launch a hedge fund [Fortune]

Signs of a top in the cupcake industry [BarbarianCapital]

Verizon's $100 billion conundrum with Vodafone [WSJ]

Hedge fund manager-diversification versus strategy-diversification [AllAboutAlpha]

Three winning fund managers from 2010 give current investment outlook [WashingtonPost]

Profile of $19 billion Canyon Partners [Bloomberg]

Hedge fund Clarium slumps from peak [Bloomberg]

Massive Discount to the Value Investing Congress in California

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The event is full of top hedge fund managers presenting their best stock picks and it is a fantastic networking resource. Click here for a massive discount to the Value Investing Congress. Discount code: W11MF4.

Dan Arbess' Xerion Fund: 2011 Investment Strategy & Outlook

Daniel Arbess' Xerion Fund is out with its investment strategy and outlook for 2011. The hedge fund, part of Perella Weinberg Partners, manages $2.3 billion and has annualized returns of 18.97% net since inception in 2003. For 2010, Xerion finished up 12.66% net. Our previous coverage focused on how Xerion likes commodities.

2011 Market Outlook

Taken directly from Xerion's year-end letter to investors, here is a breakdown of their outlook for the new year,

" - Global economy and markets remain unbalanced, dependent on government support and highly vulnerable to policy changes and conflicting national agendas. Government-stimulated market momentum will recede in 2011, in favor of either gradual normalization or renewed crisis.

- Expect continued moderate economic recovery, however frequently punctuated by episodes of macro instability. Key risks include potential over-heating and reversal in China, persistently high domestic unemployment and acceleration of sovereign debt crises in Europe and other developed economies.

- Receding tailwinds from government intervention imply security selection and idiosyncratic opportunity will be most important in 2011. Select U.S. credit opportunities as rising yields signal higher re-financing costs. “Shake Hands With China” with exposure to commodities and equities, industrials and Asian consumer- facing industries. Selective sector opportunities in U.S. Equities. Commodity bias captures both fundamental demand in EM and fiscal crisis hedge in DM."

Portfolio Positioning

Given the above themes, Xerion is positioned cautiously long and they expect U.S. credit opportunities to be limited given the large wave of restructurings over the past two years. In developed markets, they see a few equity opportunities but they still favor emerging market equity plays and continue to play their 'shake hands with China' theme.

Of Xerion's positioning, Arbess writes, "Our portfolio structure and positioning going into 2011 is quite consistent with where it was one year ago - slightly longer and more skewed toward equity strategies versus credit, but also more hedged (which is to be expected given the higher beta and volatility of equities)."

Credit: In this asset class, they're focused on event-driven corporate plays and an opportunistic tilt toward distressed credit. Arbess writes, "we also see M&A as an evolving high yield catalyst for 2011, given that sponsors have cash to use and limited organic growth opportunities, while high yield companies are in the mode of bolstering liquidity and shedding assets to fund creditor friendly actions."

Equities: Xerion is generally cautious on domestic equities and favors high growth plays in emerging markets. Specifically, they are focusing on the rise of China's consumer and how to play that. The hedge fund is concerned with the liquidity of Asian equities in general but is intrigued by the state-owned segment of China's economy. Overall, they continue to favor their 'shake hands with China' portfolio theme.

Commodities: Arbess and his team believe that industrial commodity demand has been in a 'supercycle' since 2004. They like commodities for a couple of reasons, citing that they "benefit from robust and growing fundamental demand from industrializing emerging markets, and also attract financial investors looking for monetary debasement hedge."

In particular, Xerion prefers industrial commodities to even gold, claiming that the latter is less supported by demand and more-so driven by a financial crisis hedge. The hedge fund also likes various equity plays for this theme, specifically the junior resource companies (such as Fortescue Metals Group, Ivanhoe Mines, OGX and HRT).

Concerns In The Coming Year

Xerion rounds out its commentary and outlook by commenting on reasons to be cautious this year:

"For the past two years, markets have rallied in response to government stimulus and the anticipation of an economic recovery. We are cautiously optimistic that strong growth in the developing economies will continue to anchor the global economy in 2011, while improving sentiment in the developed world could potentially unlock cash-laden corporate balance sheets, supporting an investment-led recovery. However, bullish sentiment is already largely priced in. We expect the tailwinds of QE-inspirited rising markets to subside in 2011, further highlighting the importance of security selection, idiosyncratic opportunity and events, and, above all, hedging ever-present macro risks."

In the end, Arbess' hedge fund identifies the following as the key to continued economic recovery:

"The sustainability of global growth in 2011 will be highly dependent on G-20 policy makers’ successfully reining in short-term national interests in favor of longer-term globally coordinated efforts to shore up consumption growth in the EM."

For more on Dan Arbess' hedge fund, head to our past post on Xerion's 'shake hands with China' play.

Tiger Global Invests in SEEK Asia, Continues to Play Emerging Markets

Chase Coleman's hedge fund firm Tiger Global has made another private investment, this time in SEEK Asia (a subsidiary of SEEK Limited). The hedge fund reserves a portion of its portfolio for stakes in non-publicly traded companies and we've detailed how they've been focusing on web companies in emerging markets.

Tiger's investment in SEEK Asia is a co-investment alongside the likes of Consolidated Media Holdings (CMJ) and Macquarie Capital. It appears as though the three have invested around $63 million in total. Upon news of this investment, SEEK Asia also recently announced that it has purchased 60% of JobsDB, an online employment company that focuses on Southeast Asia. The purchase price of this stake is $204 million.

To see what else Tiger Global has invested in, head to our analysis in our newsletter.

St. Joe Receives Inquiry From SEC, BlackRock Increases Stake

Since The St. Joe Company (JOE) is now a battleground stock (Bruce Berkowitz versus David Einhorn), it's only fitting that we continue our coverage of the name. Just yesterday, some interesting developments arose that we wanted to highlight.

First, JOE revealed in an 8-K filed with the SEC that the company is the subject of an SEC "informal inquiry into St. Joe's policies and practices concerning impairment of investment in real estate assets."

SEC Inquiry

Shares of JOE plunged almost 10% in after-hours trading yesterday on this news. Market Folly readers will of course recall that Greenlight Capital's David Einhorn is short JOE. His bearish thesis centers largely around the company needing to take impairments and writedowns, the exact issue the SEC seems to be looking into.

The 8-K went on to say that, "St. Joe intends to cooperate fully with the SEC in connection with the informal inquiry. The notification from the SEC does not indicate any allegations of wrongdoing, and an inquiry is not an indication of any violations of federal securities laws."

Einhorn has garnered a reputation as a successful short-seller and it might not be too much of a stretch to suggest that his involvement has piqued the SEC's interest. After all, Einhorn had correctly identified problems at both Allied Capital and Lehman Brothers in the past and profited from his short positions. You can read about his short-selling battle in his book, Fooling Some of the People All of the Time.

BlackRock Boosts Stake

In a separate development involving St. Joe, we also saw an updated 13G filed with the SEC by BlackRock. The money manager has disclosed a 12.59% ownership stake in JOE with 11,668,299 shares, boosting their collective position. This disclosure was made due to activity on December 31st, 2010.

This development is interesting because it brings another large institutional player into the ring. Previously, the main notable JOE long was Bruce Berkowitz's Fairholme Capital, who owns almost 29% of the company. However, Berkowitz is currently in a standstill agreement and can't purchase more shares. Instead, he has joined the company's board. BlackRock's position increase marks a second vote of confidence on the long side of the trade.

Battleground Stock

So now that Berkowitz has BlackRock for company, the two major shareholders will square off against David Einhorn and a bevy of other short-sellers, including Whitney Tilson's T2 Partners, among many other hedge funds who have undoubtedly not disclosed their position (yet). With word of the SEC's informal inquiry, the short sellers have delivered another potential blow to JOE longs. What comes out of the inquiry, though, remains to be seen.

Hedge Funds Reduce Equity Exposure to 25% Net Long

It's been a while since we last checked in on the latest hedge fund exposure levels so today we present Bank of America Merrill Lynch's Hedge Fund Monitor. To start the new year, they estimate that long/short equity hedge funds have further reduced exposure to now just 25% net long. Historically, average equity exposure has been 35-40% net long equities.

The last time we saw hedge funds reduce risk assets in late October, the market fell around 3.6% about a week later. Maybe it was a bit of luck with market timing, but it seems as though hedge funds in general have been ahead of the curve with their recent maneuvers.

After the market's furious rally over the past few months, it's clear that some managers think the equity market is overbought in the short-term and expect a pullback. However, many strategists like Jeff Saut believe dips should be bought.

Looking through current hedge fund trades across asset classes, there are a few notable plays that stick out. First, hedgies continue to hold crowded long positions in soybeans and corn. Crude oil and Copper are also crowded net long plays in the commodities spectrum. And turning to forex, we see that hedge funds have pressed their shorts against the Euro. Last, in interest rate plays, managers hold a crowded net short in the 10-Year notes.

Long/Short Equity

As mentioned above, the l/s equity strategy has seen a sizable reduction in net long exposure as funds lock-in gains. These hedge funds still favor large cap names (with a preference of growth over value).

Market Neutral

Interestingly enough, market neutral funds not have around 5% net short exposure. This comes after they spent the majority of 2010 with net positive market exposure. These funds have shifted from growth plays to value.

Embedded Below is Bank of America Merrill Lynch's Hedge Fund Monitor:



You can download a .pdf copy here.

So it seems that hedge funds continue to favor commodities here as inflationary plays. A month ago, we detailed that Dan Arbess' Xerion Fund preferred commodities. John Burbank's Passport Capital also favors hard assets.

It's clear hedge funds are protecting some of their gains from the equity rally as exposure has been reduced further. Hedgies reduced risk assets right before the last market decline, so we'll have to see if they've sent another warning sign with their latest reduced exposure.

David Tepper Buys Dean Foods (DF)

David Tepper's hedge fund firm Appaloosa Management has started a brand new position in Dean Foods (DF). Per a 13G filed with the SEC, the hedge fund disclosed a 7.35% ownership stake in DF with 13,396,536 shares due to trading on December 28th, 2010. The majority of shares are held in Appaloosa's Palomino fund. You can view Appaloosa's other investments in our newsletter, Hedge Fund Wisdom.

Shares of Dean Foods spiked over 11% on Friday as Appaloosa disclosed its stake. The company's shares have been on somewhat of a gradual death spiral, down 45% over the past year. In the near-term, it seems as though the company is being squeezed by input costs (namely commodities). Whether Tepper and his team see this as a value play remains to be seen, as no clear thesis has been revealed. Or, maybe this trade simply falls under his 'don't fight the Federal Reserve' trade. After all, in September Tepper said he likes equities here.

Per Google Finance, Dean Foods is "a food and beverage company. The Company operates through two segments: Fresh Dairy Direct and WhiteWave-Morningstar. Fresh Dairy Direct, formerly DSD Dairy, is a processor and distributor of milk and other dairy products in the United States, with products sold under more than 50 local and regional brands and a range of private labels."

To see what Appaloosa and other hedge funds have invested in, read up on their plays in our newsletter.

TPG-Axon Capital Reduces International Paper (IP) Stake

Dinakar Singh's TPG-Axon Capital Management recently filed an amended 13G with the SEC regarding shares of International Paper (IP). Due to portfolio activity on December 31st, TPG-Axon disclosed a 1.4% ownership stake in IP with 6,300,000 shares.

This marks a decrease in their position as Singh's firm owned 14,270,005 shares back in the third quarter. Over the course of three months, they've decreased their position size by almost 56%.

The hedge fund firm also filed a separate 13G on shares of Zhongpin (HOGS). Based on the filing, it appears as though their position remains unchanged with 3,000,000 shares. This total represents an 8.5% ownership stake in HOGS. We covered when TPG-Axon was buying HOGS back in September. Per Google Finance, Zhongpin is "principally engaged in the meat and food processing and distribution business in the People’s Republic of China (the PRC)."

Singh founded TPG-Axon in 2004 in collaboration with private equity firm Texas Pacific Group. Prior to launching his hedge fund, Singh was co-head of Goldman Sachs' principal strategies group.

International Paper is "a global paper and packaging company. It is complemented by the North American merchant distribution system, with primary markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. The Company operates in six business segments: Industrial Packaging, Printing Papers, Consumer Packaging, Distribution, Forest Products, and Specialty Businesses and Other."

For all other SEC filings, head to our ongoing hedge fund tracking series.

T2 Partners Year-End Letter: Discussing Longs & Shorts

Whitney Tilson and Glenn Tongue's hedge fund firm T2 Partners released their year-end letter to investors. The letter is one of the most thorough we've seen as it is 27 pages long and includes assessment of both their long and short positions. If you want transparency in the hedge fund industry, here's your barometer.

For 2010, T2 finished up 10.3% net compared to an S&P 500 return of 15.1%. So while they trailed the indices last year, T2 has outperformed since inception, returning 9.1% annualized net versus 2.0% for the S&P. This past year, their pain came from various short positions and essentially 'missing' the quantitative easing round 2 rally.

T2 Partners' top 12 long positions at the end of 2010 were:

1. Grupo Prisa (PRIS & PRIS.B)
2. Microsoft (MSFT) ~ see their thoughts on MSFT here
3. Berkshire Hathaway (BRK.A/B)
4. BP (BP) ~ their thoughts on BP here
5. General Growth Properties (GGP)
6. CIT Group (CIT)
7. Kraft (KFT) and warrants
8. Seagate Technology (STX)
9. Iridium (IRDM) and warrants
10. Automatic Data Processing (ADP) ~ see their presentation on ADP
11. Resource America (REXI)
12. Anheuser Busch InBev (BUD)

While we've presented analysis on T2's longs before, we want to single out Seagate Technology (STX) and CIT Group (CIT) as we haven't seen Tilson talk about these before. He likes STX mainly because it is trading at an absurdly cheap valuation and he thinks fears over the hard drive (HDD) market (versus the solid state drive market) are overblown.

Tilson and Tongue fancy CIT due to the company's potential to capture financing-cost savings. Additionally Tilson writes, "Even more intriguing is the possibility that a healthy bank might acquire CIT, attracted by the enormous earnings leverage available in applying the acquiring bank's much lower borrowing costs to CIT's business model."


T2's top 10 short positions (in alphabetical order):

1. AIG (AIG)
2. Homebuilders (various individual companies plus XHB the ETF)
3. InterOil (IOC) ~ analysis of their short position here
4. ITT Educational (ESI), as well as other for-profit education plays
5. Lender Processing Services (LPS)
6. Lululemon Athletica (LULU)
7. MBIA (MBI)
8. Netflix (NFLX)
9. Salesforce.com (CRM)
10. St. Joe (JOE)

Tilson and Tongue highlight that their short book caused them much pain last year. Accordingly, they set aside a portion of their letter to address how they manage short positions that move against them. In short (no pun intended), they re-evaluate their analysis to determine whether to add to the position, do nothing, or trim/exit.

Specifically, they trimmed their position in Netflix (NFLX) and replaced part of it with put positions. (We posted why Tilson is short Netflix here). They've also done this with other short positions in order to better manage risk. After all, remember that these stakes are merely hedges to their long book as T2 is always net long (they are currently 40% net long).

Embedded below is T2 Partners annual letter to investors for 2010:



You can download a .pdf copy here.

It's great to see a manager with such transparency in an otherwise secretive and guarded industry. T2's portfolio overlaps with positions many other hedge fund managers own that we've highlighted as well.

T2 is short JOE and so is Greenlight Capital (see David Einhorn's short thesis on JOE). While T2 is short ESI, hedge fund Blum Capital is long ESI. And while Tilson and Tongue are short AIG, Bruce Berkowitz's Fairholme Capital is long AIG. It's fun to see hedge funds take different stances on various stocks because that's what makes a market.

Eton Park Starts New Vallar (LON:VAA) Position

Eric Mindich's hedge fund firm Eton Park Capital Management has started a brand new position in Vallar (LON: VAA). The London Stock Exchange has revealed that due to trading activity on the 22nd of December, 2010, Eton Park now controls 5.03% of Vallar's voting rights.

In terms of other recent Eton Park activity, we saw that the hedge fund supported Air Products' (APD) latest bid for Airgas (ARG) in one of their arbitrage trades. However, nothing has materialized there. Eton Park's most recent acquisition is a bit of a head-scratcher and you'll see why below in the company description:

Per Google Finance, Vallar is "a holding company formed to acquire a single company, business or asset that has operations in the global metals, mining and resources sector. The Company focuses on the Americas, Russia, Eastern Europe and Australia. It focuses on commodities, including base metals, coking coal, iron ore, thermal coal, gold, silver and uranium."

For other activity out of Eton Park, we also detailed an increase in their Lonrho (LONR) stake.

Odey Shorts JJB Sports While Activists Remain Long

It looks like we might have another potential battleground stock on our hands. European hedge fund giant Odey Asset Management has disclosed a new short position in JJB Sports (LON: JJB), a sporting goods retailer. Due to portfolio activity on the 24th of December, Odey are short -0.61% of JJB's shares outstanding. Just yesterday we posted up that Odey remains optimistic on stock markets. But obviously, as a hedge fund, they will have short positions as well.

Crispin Odey's hedge fund had to declare this position under UK regulations because JJB is currently involved in a rights issue and Odey holds greater than a -0.25% short position. For more on these rules, see our primer on UK disclosures for more information. According to recent reports in the FT, JJB Sports is expected to ask investors for a further £50m cash injection, following £31.5m promised just before Christmas.

A number of activist hedge funds have taken the other side of the trade, though. Crystal Amber, managed by Richard Berstein, owns 15.4% of JJB's shares. Additionally, Bill Gates' Casecade Fund holds a 5.5% ownership stake.

Odey's short position is even more intriguing because back in the summer of 2010, a quarterly letter from Odey disclosed that their funds were long another UK sports retailer, Sports Direct (LON: SPD). Back then, they owned 0.84% of the voting rights. If that position is still open today, then Odey potentially have an interesting pair trade of long SPD, short JJB. You can scroll through our coverage of other hedge fund short positions here.

Per Google Finance, JJB Sports is "a sports retailer supplying branded sports and leisure clothing, footwear and accessories. JJB Sports is a high street sports retailer, with 250 stores in the United Kingdom and Eire. It provides a range of products covering United Kingdom sports."

For more from hedge fund Odey, be sure to see Crispin Odey's latest market commentary.

Second Curve Acquires Mercantile Bank (MBWM) Stake

Tom Brown's hedge fund firm Second Curve Capital have started a brand new position in Mercantile Bank (MBWM). Per a 13G filing with the SEC, the hedge fund reveals that due to trading activity on December 30th, Second Curve now owns 5.1% of MBWM with 442,707 shares.

This is a brand new position because the firm did not disclose owning shares in their previous SEC filings. Prior to founding Second Curve, Tom Brown headed the financial services group at Julian Robertson's Tiger Management. During the financial crisis, Brown was painfully early on his bullish call on the financials and it cost him dearly at the time.

Per Google Finance, Mercantile Bank "wholly owns Mercantile Bank of Michigan (the Bank). The Bank is a state banking company. The Bank’s primary service area is the Kent and Ottawa County areas of West Michigan, which includes the City of Grand Rapids in the State of Michigan. The Bank, through its seven offices, provides commercial banking services primarily to small- to medium-sized businesses and retail banking services in and around the Grand Rapids, Holland and Lansing areas."

For more on Tom Brown's hedge fund, we detailed yesterday that Second Curve acquired more CompuCredit (CCRT) as well.

What We're Reading ~ New Year Edition

If you missed it, Bespoke's 2011 roundtable [Bespoke]

Letter from Citadel's Ken Griffin [Dealbook]

Growth versus value [AbnormalReturns]

In 2010, we learned that... [ReformedBroker]

On an MBA versus CFA [ResearchPuzzle]

Interview with Alexander Roepers of Atlantic Investment Mgmt [Barron's]

Howard Lindzon interviews Mark Cuban [StockTwits]

Warren Buffett speaks about succession planning at Berkshire [Vanity Fair]

How Chipotle (CMG) is winning burrito wars [Bnet]

Six themes for 2011 [Pragmatic Capitalism]

On why Google (GOOG) is undervalued [TwistedValue]

Rising interest rates positive for equities? [ValuePlays]

How to come up with investment ideas [GannonOnInvesting]

Emerging hedge funds the belles of the ball [AllAboutAlpha]

Farallon receives mixed messages [Pensions&Investments]

From analyst to hedge fund founder in six years [Fortune]

On the respective Alcon (ACL) and Dynegy (DYN) deals [Dealbook]

Start the new year with an investment report card [Rational Walk]

The best economics blogs [WSJ]

New Year's hangover for stocks? [Barron's]

Bullish sentiment reaches historical extremes [Bespoke]

Hedge fund managers bullish on US stocks [Pensions&Investments]

Investors flocking to emerging market bonds [InstitutionalInvestor]

Municipal bond buyers on guard [BondBuyer]

Harbor Investment Conference: Ideas From Ackman, Berkowitz & More

Want to hear some investment ideas from top hedge fund managers? The Harbor Investment Conference will take place February 3rd, 2011 in New York City and provides the perfect opportunity. All proceeds from the event goes to the Boys and Girls Harbor, so it's a wonderful cause. At last year's event, the 8 stocks that were recommended were up an average of 39% at the end of 2010. There are only 331 seats available so act quickly!

Here are the speakers at the event:

Bill Ackman – Pershing Square Capital Management
Bruce Berkowitz – Fairholme Capital Management
David Darst – Chief Investment Strategist, Morgan Stanley Smith Barney
Alex Klabin – Senator Investment Group LP
Mick McGuire – Marcato Capital Management, LLC
Craig Nerenberg – Brenner West Capital Advisors, LLC
Todd Sullivan – Rand Strategic Partners

Everyone of course knows Bill Ackman and Bruce Berkowitz. However, some of the other speakers should offer great insight as Mick McGuire previously worked at Pershing Square and Craig Nerenberg runs a similar strategy to Pershing Square with a concentrated portfolio. Also, our good friend Todd Sullivan from ValuePlays.net will be speaking as well.

Embedded below is an information and registration sheet for the conference:



You can download a registration .pdf here.

The event is coming up soon and there are only 331 seats available, so sign-up to hear some hedgie investment ideas and support a great cause at the same time.

Strategist Jeff Saut Cautious On Market, Still A Buyer On Dips

It's been a long time since we last checked in on market strategist Jeff Saut's commentary and figured the new year would be a perfect time to do so. In short, he is currently cautious on the stock market, wary of a repeat of January 2009. So, why is he cautious?

Saut writes, "in the short-term, the odds are not tipped decidedly in investors' favor, at least not by the metrics I use. Indeed, the Volatility Index (VIX/17.75) is down to 'complacency levels' last seen in April right before the 17% correction. Ditto, investors intelligence data shows advisory sentiment approaching the bullish extremes of October 2007."

Simply put, he feels that investors have become complacent and bullish sentiment has skied high, something he is using as a contrarian signal. But while the market strategist feels that stocks are due for a pullback, he is a buyer of those dips.

One thing we've noticed is that Saut has often been correct in his past calls, so kudos to him for utilizing timing signals such as volatility, sentiment levels, and overbought/oversold metrics. At the same time, he is often early with his calls and he freely admits this in his latest market commentary. After all, momentum and bullish sentiment can last much longer than many anticipate. It's a tough train to jump in front of.

For instance, back in late October, Saut called for a pullback (which he also saw as a buyable dip). What happened? The market saw a nice pullback... but not until a few weeks into November. Followers of Saut's prescient call (dip buyers) would have made a pretty penny on that trade.

Saut by no means is recommending a massive short position here, but it does seem as though he advocates taking some profits, raising cash, and preparing for a near-term correction that can eventually be bought as the new year begins. Embedded below is Saut's latest investment strategy piece entitled, 'The White Hurricane':



You can download a .pdf copy here.

For interesting past missives from the market strategist, check out Saut's businessman's risk portfolio, as well as his risk management principles.

Crispin Odey Remains Optimistic On Stock Markets: Latest Commentary & Outlook

Crispin Odey, founder of hedge fund firm Odey Asset Management, is out with his latest market commentary and outlook. Back in September, he noted that equities were attractively priced but unloved. Since then, equities have rallied furiously. So, what's his latest take? See below for his outlook penned on the 30th of November.

"Crispin Odey
Founding Partner | Portfolio Manager
Current Outlook

Easy money takes the pain out of hard knocks. In May, in August and again in November, markets have attempted to dissolve the Euro – to fracture it. Insolvency in Greece came about because their governments could not collect taxes. Insolvency in Spain and Ireland relates to banks lending against mortgages on margins of only 20 basis points over Libor whilst borrowing at 100-200 basis points above Libor.

These issues need addressing. Keynes wrote in the thirties that: “…the absolutists of contracts are the parents of revolution.”

Banks need to be allowed to reset lending margins; they need to be profitable. Who cares if this demands legislation to take effect?

It is odd that Merkel has been the instigator of the Euro wobbles. She is of course worried that German banks will need to be bailed out if these countries go down. She is right to be worried that German bankers might be foolish lenders: look at the history. Recently German banks’ net interest margins should have soared because in Germany there were no tracker mortgages, no teaser rates. Borrowers borrowed for 10-15 years at nominal rates. Two years ago those borrowers were borrowing at 4% and the bank was making nothing, today they are borrowing at 4% and the bank could be making 300 basis points of margin. Instead, by matching the duration risk and having to borrow at 100 basis points over Libor, German banks still make little money out of mortgage lending.

Throughout these crises I have remained bullish and I still remain more optimistic for stock markets than for a long time.

Why? Because the markets are too cautious about the strength of the economic cycle. In previous quarterly calls I have outlined how the USA is now successfully encouraging economic growth and inflationary pressures to grow in the emerging market economies. But what is not understood is that Germany in this regard looks exactly like an emerging market. Thanks to the problems of the Euro, German exporters are not only enjoying a massive boom, they are also enjoying a currency advantage of around 30% over their Japanese competitors. Couple this with a tax rate which, since the last boom in 89-90, has fallen from 52% to 30%, and shareholders – for the first time – will almost certainly enjoy an unheralded boom.

In a country where individuals spend more on cut flowers than equities, these profits will come to us – yes to the foreigners. This is not going to be popular in Germany, and quite quickly I expect profits to be commuted into wage increases, but this will do something which is not expected. It will mean that from next year the boom in consumption in Germany will help to lift all of these bankrupt southern economies out of recession. The Euro will work as it was intended. German inflation will be higher than others, German competitiveness will suffer and yes we will stop having Euro crises. Of course Germany will not enjoy this boom and if it was down to their authorities, interest rates would rise and their currency would strengthen but they are going to find their feet being unable to reach the pedals as Ireland et al found this year.

Bernanke, who I think is much maligned, wrote this recently in ‘Rebalancing the World Economy?’

As currently constituted, the international monetary system has a structural flaw: its lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances. This problem is not new. In particular, for large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.’

So like Simeon, are we about to say; ‘today this prophecy is fulfilled’? Could there have been a more perfect Christmas tale than this? Yes, in a way.

Bernanke is wrong. The mechanism is starting to work. It will shower profits upon those fortunate enough to see the opportunity. It may well start the beginning of the bear market in government bonds but it will also lead to a much more balanced global economy – balanced but inflation prone and inflation bound."

The key takeaway here is that he is constructive on the markets and remains bullish and optimistic, flying right in the face of caution and pessimism. Odey thinks there could potentially be a bear market in government bonds and we've highlighted that numerous other hedge fund managers agree with him. Odey sees inflation in the world's future as well and if you concur, here are the best investments during inflation.

It's been a while since we last covered this hedge fund as back in October we noted their new short position in Provident Financial (LON: PFG). You can also read Odey's previous market commentary here.

Dan Loeb & Third Point's Latest Exposure Levels

Dan Loeb's Third Point Offshore Fund finished 2010 up 33.5%, compared to an S&P 500 return of 15.1%. Since inception in December of 1996, Third Point has returned an impressive 18.6% annualized. The hedge fund manager recently released its latest December exposure levels so we wanted to provide readers with an update.

Here are Third Point's top holdings as of year end:

1. Gold
2. Delphi Corp (multiple securities held)
3. Chrysler (multiple securities held)
4. Potash (POT)
5. Lyondell (LYB)

You can learn about more of Third Point's investments in our newsletter. Physical gold continues to be a massive position for Loeb and he potentially could be using the precious metal as some sort of tail risk hedge. Interestingly enough, Third Point continues to own Potash (POT) even after BHP Billiton's bid for the company failed. It appeared as though the hedge fund originally purchased POT as a arbitrage trade but maybe they like the natural resource exposure as an inflation play. Or maybe they still see the company as a viable takeover target, who knows.

Lastly, Lyondell finally shows up as a top holding for Third Point as the company exited bankruptcy. The chemical maker's equity now trades under ticker symbol LYB. Back in the second quarter we noted Loeb's fondness for post re-organization equities, and that portfolio theme continues.

Exposure Levels

Third Point has its highest net long equity exposure in basic materials and financials. In total, they are 60.1% long, -8.4% short, leaving them 51.7% net long equities. One geographic note is that Third Point had previously been net short the Asia region, but are now net long ever so slightly.

In terms of credit exposure, Third Point has its highest net long exposure in mortgage backed securities (MBS) at 19.4%, followed by distressed at 14.2% net long. Third Point is also net short government securities at -10.9%. Overall in credit the hedge fund is 32% net long.

Top Winners

In Loeb's portfolio, big winners include Delphi (multiple securities held), NXP Semiconductor (NXPI), Lyondell (LYB), Chrysler (multiple securities held), and Accuride (ACW). He highlighted NXPI in his recent letter to investors as Third Point participated in the IPO and sees upside in the name. Shares of Accuride also recently started trading in late December after re-listing on the New York Stock Exchange.

Top Losers

Third Point's portfolio saw weak performance from the following plays: three undisclosed short positions (undoubtedly due to the market's large rally), Fortis (multiple securities held), as well as State Bank of India (BOM:500112), a name we have previously not seen disclosed.

That wraps up our summary of Third Point's end of year exposure levels. You can check out more of Third Point's portfolio in our newsletter. And to learn to invest like Dan Loeb, check out his recommended reading list here.

Second Curve Capital Files Form 4 on CompuCredit (CCRT)

Tom Brown's hedge fund firm Second Curve Capital recently filed multiple Form 4's with the SEC regarding transactions in shares of CompuCredit (CCRT). These filings represent indirect ownership and were made by advisory clients of Second Curve. In total, Second Curve reported acquisition of 81,000 shares during the last 10 days of December.

Second Curve acquired their shares through various lots ranging in price from $6.59 to $6.95. Shares of CCRT are currently trading around $6.72. After all purchases were made, they owned 4,260,630 shares of CompuCredit. We noted Second Curve reported transactions in CCRT back in September as well.

Also, in a separately filed Form 4, advisory clients of Second Curve Capital have purchased 29,000 shares of Tennessee Commerce Bancorp (TNCC). The purchases were made in the last three days of December in various lots at prices of $4.84, $4.82, and $4.91. After all was said and done, Second Curve reported owning 1,271,456 shares of TNCC. We detailed Second Curve's recent addition of TNCC shares and this marks a subsequent recent purchase after originally purchasing shares in August.

Per Google Finance, Tennessee Commerce Bancorp is "a bank holding company formed to own the shares of Tennessee Commerce Bank (the Bank). The Bank conducts business from a single location in the Cool Springs commercial area of Franklin. As of December 31, 2009, the Bank had total assets of $1.4 billion. The Bank offers a range of retail and commercial banking services."

CompuCredit is "a provider of various credit and related financial services and products to or associated with the financially underserved consumer credit market."

Scroll through all of our coverage of the latest SEC filings made by prominent hedge funds.