What We're Reading ~ 4/1/10

Evaluating equity investments: Accounting for Value [Stephen Penman]

Famed subprime short-seller Michael Burry's FCIC testimony [ValueWalk]

AIG's mistake explained [Economics of Contempt]

How Verizon could purchase Sprint and harm Vodafone [Cautious Bull]

Bill Ackman speaking at Make A Difference in Milwaukee on April 27th

Bridgewater, Elliott & SAC shape report on long-term investing [AR+Alpha]

More on Chinese reverse mergers [CNBC]

GGP, HHC, The Wall Street Journal and David Simon [ValuePlays]

What hedge fund managers know about making money [Marketwatch]

Managed account platform assets grow by 27% [HFMWeek]

Hedge funds may salvage month despite quake [WSJ]

Short linkfest this week. For more good financial reads, head to Abnormal Returns

Crispin Odey on Agricultural Commodities & Farming

The founder of UK based hedge fund firm Odey Asset Management, Crispin Odey, is out with his latest market commentary and investment outlook. Penned on the 28th of February, Odey writes on the slightly tangential, yet increasingly talked about topic of farming and agricultural commodities.

We've detailed how legendary investor Jim Rogers is bullish on agriculture and has also bought farmland. Also, the now famous subprime short-seller Michael Burry also bought farmland. While these well-known investors focus on arable land, Odey's recent commentary expresses concern regarding agricultural commodities and supply/demand imbalances.

Here's Crispin Odey's outlook:

"This is always the time of year when my farming friends ring me up every day to ask 'should they be selling forward their harvest?' The truth is that at this time of year they have little to do other than worry about it, and because they worry they are always early sellers. Like everyone, they are risk averse. By now with the harvest less than six months away, they are probably 65% pre-sold and yet they watch the price rising and falling and of course on weak days they kick themselves for not selling more.

In my hedge fund we are also forced to get involved. We are shareholders in a station in Australia which this year has grown over 23,000 acres of cotton, and plans to grow 25,000 acres next year. Cotton has nearly tripled in price in eighteen months and it is no surprise to find that we sold this year's harvest, which is just about to start, at half the current prices. Why? Because we had sold 2/3 of our crop forward by November of last year. We were the lucky ones because our neighbours further down the Darling River lost most of their crop, thanks to the flooding, and the rise in the price from $100 to $220 per bushel was nothing more than them covering that shortfall. Like many people, they hated taking a loss and the same conservatism that had led them to sell forward, led them to sit and hope that the price would come down before delivery in April. Many of these farmers face bankruptcy, in the best year for cotton in 30 years. This year the farm will make a 30% return on our investment made nearly four years ago. If prices hold into next year we would almost earn what we paid for the farm, in one year. In other words prices are very unlikely to hold!

However, if you look generally at where we are globally, soft commodities are suffering from the same kind of demand/supply imbalance that has driven steel production worldwide to go from 580 million tons to over 1350 million tons in less than a decade. Taking grain production last year globally, the world produced 2.179 billion cubic tons, down 2.4% from the previous year, but up from 1.87 billion cubic tons, produced in 2000. However, consumption was 2.235 billion cubic tons and inventories in thenorthern hemisphere are now 27% below where they were in 2000 and down 15% in a year to 425m tons. The importance of China can't be overstated. The USA increased exports of corn, soy beans, wheat and cotton by 18% last year, but China's share of exports rose by 34%.

Over ten years China's urban incomes have risen threefold; their agricultural incomes have doubled. If you believe like I do that China's growth will not falter until their current account deficit goes negative, my farming friends may have to devise an alternative pastime after the shooting season ends in January, to selling their harvest early.

The corollary of all of this is of course that the cost of living is rising for the developing world at an alarming rate. Most of these countries exacerbate their problems by subsidising food prices. Investors must expect that revolutions, sparked by bread riots, will be part of their diet, for as long as China's demand continues to grow."

More insight from this manager can be found in Odey's previous commentary.

Jeff Saut: A Lot of Price Risk Has Been Removed From Select Stocks

The last time we checked in with market strategist Jeff Saut in late February, he was putting money to work in stocks, but cautioned that the correction was not yet over. And he was right, as the market fell 4.77% further in the weeks after his prescient call.

This time around, his latest missive is entitled, "Be Conservative, Not Conventional." With a title like that, one can easily guess what the gist of his message is. He quotes the wise value-investing-father Benjamin Graham who wrote, "The essence of investment management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept."

Saut hints that the recent low in the market on March 16th could be "THE" low for quite some time, but if a re-test were to occur, he'd be a buyer. He also reiterated his call in buying Williams Companies (WMB) when it was trading around $28.70. This stock has been a hedge fund favorite and you can read an in-depth analysis of WMB in our current issue of Hedge Fund Wisdom.

He also cites fondness for Peoples United Financial (PBCT), LINN Energy (LINE), and EV Energy Partners (EVEP).

Overall, the market strategist concludes that, "I think a lot of the price risk has been removed from select stocks and therefore I am not afraid to gradually accumulate favored names."

Embedded below is Jeff Saut's latest market commentary:



You can download a .pdf copy here.

More insight from the strategist can be found in his thoughts on the never-ending market cycle of fear, hope and greed.

Hedge Fund Glenview Buys More ArvinMeritor (ARM)

Larry Robbins' hedge fund Glenview Capital has increased its position in ArvinMeritor (ARM). Due to portfolio activity on March 18th, 2011, Glenview has disclosed a 5.72% ownership stake in ARM with 5,388,617 shares.

This marks a 33% increase in their position size from the end of 2010 when they owned 4,038,617 shares. Since the beginning of 2010, shares are down around 6%. Keep in mind also that ARM's ticker symbol will be changing to MTOR at the end of the month. In addition to this recent portfolio activity, Larry Robbins' hedge fund recently expanded its short portfolio as well.

Per Google Finance, ArvinMeritor is "a global supplier of a range of integrated systems, modules and components to original equipment manufacturers (OEMs) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, off-highway, military, bus and coach and other industrial OEMs and certain aftermarkets, and light vehicle OEMs."

Glenview Capital Expands Short Portfolio

Larry Robbins' hedge fund firm Glenview Capital has recently expanded their short equity portfolio to include more single names (rather than index shorts). Why?

The firm is still seemingly optimistic about equities as a whole and has transitioned money from long fixed income strategies to long equity strategies due to better risk/reward. At the same time, Glenview has also found shorting opportunities in companies that could be negatively affected by the current and impending economic and monetary environment (read: higher interest rates).

Below is an excerpt from Glenview's annual letter where they identify compelling short opportunities in REITs, cruise lines, healthcare, and companies largely reliant on government contracts:

"a) We established short positions in a series of REIT equities whose valuations reflect exceedingly low cap rates proportional to the exceedingly low interest rate environment. We do not believe that our core competency is predicting forward interest rates, but we are exceedingly comfortable betting that over the course of the next year, twelve months will pass. As we examine the term structure of interest rates, a 3.3% 10-year bond yield is comprised of a one year yield of 25bps, and therefore the subsequent nine years average 3.65% (of which the last eight years are 4%). For REITs that reflect a 6% cap rate, a 70bps move over the two years will create 10% multiple compression solely by moving two years forward on the term structure of interest rates. Should inflation accelerate above expectations, this rate rise would be even more pronounced, and the multiple compression more significant. While we don’t expect REITs to implode, we do believe they will underperform over time.

b) We established short positions in cruise lines and other travel related equities that will likely see profits eroded by declining revenue on aging assets combined with inflationary cost pressures including oil. Furthermore, asset intensive travel industries such as hotels are also often valued on cap rates and susceptible to the same valuation compression as REITS, as described above.

c) We broadened our portfolio of shorts in companies that derive a significant portion (or all) of their revenue from government sources whose ability to grow such spending is impaired by their own balance sheet constraints and fiscal deficits. Such companies are likely to see decelerating revenue trends and more intense pricing and margin pressure as a result of the deteriorating financial health of their government and government related customers.

d) In healthcare, we expanded our short positions in companies that we believe will come under more intense pricing and reimbursement pressure as the healthcare reform debate migrates from coverage back towards bending the cost curve."

While most hedge funds don't reveal their exact short positions, they often provide hints. For example, if Glenview is shorting cruise lines, there are only so many players in this space such as Carnival (CCL), Royal Caribbean (RCL), etc. And in the REIT space, a quick valuation screen can narrow down the field somewhat.

A cursory look at Glenview's long portfolio of course reiterates that they already have hefty long exposure in the healthcare sector via McKesson (MCK), Express Scripts (ESRX), Life Technologies (LIFE), and Medco Health (MHS). The first three have been some of Glenview's largest positions for a while now and so it seems their new healthcare shorts are obvious hedges to this copious long exposure.

We recommend reading the full Glenview letter, available via Dealbreaker.

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For an example of the high quality research Dasan Stock Digest puts out, here's a past earnings summary report he put out on Apple (AAPL). Embedded below is the sample which includes the model, conference call notes, and analysis of the company:

What We're Reading ~ 3/25/11

Looking again at the housing market [Big Picture]

Paulson, Elliott, D.E. Shaw, Caxton lobby at the Fed [AR+Alpha]

Hedge fund legend Paul Tudor Jones on failure [ReformedBroker]

Glenview Capital on the end of quantitative easing [PragCap]

On talking your book [Abnormal Returns]

Hedge funds like distressed debt [FINalternatives]

8 Unusual things I learned from Warren Buffett [James Altucher]

Old but good: Is gold an inflation hedge? [Global Economic Trend Analysis]

Investing rules and missed opportunities [Reformed Broker]

Prem Watsa's 2010 letters to Fairfax shareholders [.pdf link]

Jeffrey Kaplan becomes Appaloosa's COO [TheDeal]

A Main Street take on hedge funds [WSJ]

Herds on the street: traders instant messaging [WSJ]

Carl Icahn's fears [MoneyNews]

Maverick Capital Reduces Rightmove Position (LON: RMV)

Lee Ainslie's hedge fund Maverick Capital recently reduced its position in UK traded Rightmove (LON: RMV). Due to trading on March 17th, Maverick's position has gone below the 3% ownership stake that requires regulatory disclosure.

The hedge fund could either still hold a small position (<3% of shares) or could have sold out of it completely; it's impossible to discern. We won't know anything further unless they breach the 3% threshold again.

Hedge Funds Gradually Reducing RMV Positions

Rightmove is intriguing because it has garnered interest from many prominent hedge funds. However, these funds have all been reducing their position over time. Steve Mandel's Lone Pine Capital, as of last disclosure, owns 4.99% of RMV's stock. At one point back in December 2008, they held over 10% of shares. We've also detailed some of Lone Pine's recent portfolio activity here.

Additionally, Brett Barakett's Tremblant Capital Group currently own around 3.97% of Rightmove's outstanding shares. While they still own it, they have steadily reduced their position since a peak ownership stake of 14.22% in September 2008. For the rest of our coverage of hedge fund positions in UK markets, check out Eton Park Capital's recent activity.

Per Google Finance, Rightmove is "a United Kingdom-based company that operates in a residential property industry, connecting people to properties. The Company is principally engaged in the operation of the Rightmove Website, rightmove.co.uk, which is the residential property portal. Its customers include estate agents, rental agents and home developers, who pay fees for the right to display properties on the Rightmove Website, which provide home hunters with property details to search."

For more from Ainslie's fund, check out Maverick Capital's year-end letter discussing the impact of fund size on returns.

Free TurboTax Online

Tax season is upon us and for those of you in a crunch or scrambling for a CPA, just a reminder that you can still get free TurboTax online. Taxes are due April 18th, so get those 1099-INT and 1099-DIV's locked and loaded.

John Paulson On The "Risk" In Risk Arbitrage

John Paulson catapulted to hedge fund fame during the financial crisis for his profitable bets against subprime. His exploits were even catalogued in the excellent book, The Greatest Trade Ever. Yet before all that, he paved his way on Wall Street in mergers & acquisitions.

In 1994, he started Paulson Partners and focused on arbitrage strategies. Today, Paulson & Co is the third largest hedge fund. This article traces Paulson's roots in order to learn about risk arbitrage from the manager himself.

It's little known that Paulson actually authored a chapter on the subject in the book, Managing Hedge Fund Risk compiled by Virginia Reynolds Parker. She is a graduate of Harvard Business School and founder of a firm that specializes in the design and management of fund of hedge funds.


The "Risk" in Risk Arbitrage

In the book, John Paulson writes that simply, "The 'risk' in risk arbitrage is therefore anything that affects the deal's completion, the timing of completion, or the amount of consideration received at completion."

His chapter on the subject begins by sharing advice from a risk arbitrage veteran with over 40 years of experience. This practitioner told him that, "risk arbitrage is not about making money, it's about not losing money." Given such prescient advice, it should come as no surprise that the "risk" in risk arbitrage is the key focus.

Paulson divides risk into two categories:

1. Macro Risks: Such as interest rates, exchange rates, commodity prices, and market volatility.

2. Micro Risks: Details pertinent to the specific transaction such as regulatory issues, financing, and earnings.

When looking at arbitrage opportunities, he lays out screening criteria in which he says to avoid the following: agreements in principle, deals subject to financing, targets with poor earnings, and deals in cyclical or highly regulated industries.

On the other side, he prefers to focus on: definitive agreements, large acquirers, deals with no financing conditions, reasonable valuations, and limited regulatory risk.

He concludes that, "Unfortunately, every deal has risk, so one cannot avoid risk entirely. Instead, one must prudently manage risk to produce a desired return with minimal drawdowns and low market correlation."

For an in-depth look at the strategy, embedded below is John Paulson's chapter from the book Managing Hedge Fund Risk:



You can download a .pdf copy here.

While Paulson got his start in merger arbitrage (and still today runs a fund pursuing that strategy), he has also ventured into new territory. His bets against subprime have been well documented. He's also bet on a US recovery via his aptly named Recovery Fund. His next big wager is a bet against the US dollar via his gold fund. And, in his year-end letter, he said he is recently also focusing on restructured equities.

Paulson & Co has evolved into an asset-gathering behemoth pursuing multiple strategies. But Paulson's roots stem from risk arbitrage and hopefully the above has been a useful look at this popular hedge fund strategy from a prominent manager himself.

For further insight from on hedge fund strategies from John Paulson and other managers, check out the book Managing Hedge Fund Risk. And for analysis of Paulson's latest investments, head to Hedge Fund Wisdom, our quarterly newsletter.

Eton Park Capital Reduces Vallar Position

Eric Mindich's hedge fund Eton Park Capital recently filed a disclosure in the UK due to trading on March 7th. Eton Park have reduced their ownership in Vallar (LON: VAA) from 5.03% of shares outstanding down to a 3.52% ownership stake. Eton Park first started a new position in Vallar shares back in December 2010.

Mindich founded Eton Park after being named the youngest partner in Goldman Sachs history at age 27. He launched with $3 billion in 2004 and it was one of the largest hedge fund launches ever. The hedge fund primarily pursues arbitrage strategies.

Per Google Finance - "Vallar PLC, formerly Vallar Limited, 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. As of July 31, 2010 the Company had not yet commenced operations. The Company’s subsidiary is Vallar Holding Company Limited."

Analysis of Tetragon Financial Group (TFG): Excerpt From Our Newsletter

The following is an excerpt from the current issue of our Hedge Fund Wisdom newsletter (click here for a free sample). It provides updates on what top hedge funds are buying/selling and the investment thesis behind their picks:

Craig Nerenberg from Brenner West Capital pitched Tetragon Financial Group (TFG) at the Harbor Investment Conference on February 3rd as a top idea for 2011. TFG is a classic discount to net asset value (NAV) idea coupled with tailwinds that will continue to grow NAV, at least in the near term.

Company/Industry Background

TFG is a closed-end investment management company that buys the equity tranches of collateralized loan obligations (CLOs), i.e., it invests in CLO residuals. TFG has invested in $1.4bn of CLO equities, which have been written down to $1.0bn, and it charges investors a 1.5% management fee and 25% incentive fee over a LIBOR + spread hurdle.

After a dislocation in the financial markets, CLOs (and TFG) can deliver higher return on equity (ROE) because they have fixed liabilities that can't be pulled off and they can generate outsized returns by locking in wider spreads.

Potential Risks

The key risk for TFG is deterioration in the health of the capital markets, which would lead to higher credit spreads and defaults, and consequently lower asset prices and cash - trapping in the CLOs. Even though TFG has no debt and its cashflows would not be impacted, its NAV would go down and with it, its price (it doesn't trade above NAV because of the high volatility and low/mid-teens planned ROE).

Bull Versus Bear

The bull thesis is that CLO equity has been growing rapidly due to spread compression in the institutional loan and high-yield markets, a trend that has continued in January 2011. The bear thesis is predicated on the loan-refinancing cliff that the market is facing in 2013-14 as CLOs enter their “end of reinvestment” period, which eventually takes out 40% of the refinancing supply.

Valuation

(Originally published February 21st) TFG trades at 75% of reported January 2011 NAV of $9.82 versus a 20% premium-to-NAV valuation for its closest comp, KKR Financial (KFN). This NAV excludes an additional $1.60 of value that will accrete into NAV from the reversal of its accelerated loss reserve (ALR), net of incentive fees. TFG's management has indicated that the NAV is projected to grow at a 15% IRR, based on assumptions that are more conservative than current market indications. Net of the 25% incentive fee, TFG's NAV will grow at a rate of 11.25%, so by year-end 2011 it could be $12.50 (inclusive of the ALR).

If it continues to narrow the discount to KFN and trades at 80% of NAV, the stock should be at $10, which is (now) around 40% upside from where it's been trading recently. Assuming KFN's 20% premium to NAV valuation, TFG could be a $15 stock, though there are reasons for a discount to KFN to persist: low liquidity, listed outside of the US, and investors feeling sour about management capturing 25% incentive from the ALR. Nerenberg's hedge fund Brenner West Capital has hedged its long position in TFG with a short of KFN.

This is only a brief excerpt. For more analysis of the latest investments made by top hedge funds, click here for the current 90-page issue of our newsletter: Hedge Fund Wisdom.

Why Did Warren Buffett Buy Lubrizol? Pricing Power

When Warren Buffett released his 2010 annual Berkshire Hathaway letter, much was made of the fact that the legendary value investor was on the prowl for large acquisitions. His quote, "our elephant gun has been reloaded, and my trigger finger is itchy," sent analysts scrounging for potential acquisition targets. Well, we've found the smoking gun.

While many looked for a large deal akin to Buffett's massive purchase of Burlington Northern Santa Fe, Berkshire Hathaway announced it would be buying on a slightly smaller scale, purchasing a $9b specialty chemical company, Lubrizol (LZ).

There are many takeaways from this acquisition, but the mainstream media seems to be missing one key point. While yes, emerging markets are part of the story and "America isn't going away" is also part of it, there is one main reason worth highlighting further: pricing power.

1. Lubrizol has raised its product price 18 times since 2004 as evidenced by a slideshow from its analyst day in October:

(click to enlarge)

2. In an interview with the Financial Crisis Inquiry Commission (FCIC), Buffett said, "The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business." Lubrizol appears to fit the bill.


3. Lubrizol's ability to pass on input costs is superb due to working with customers as early in advance as they can in a collaborative manner. It also helps that their customers have also been able to successfully raise prices as well.


4. Some structural tailwinds behind automobile manufacturer BYD (another Buffett position) are aiding the Lubrizol thesis. Per a Lubrizol presentation, they say that:

"Looking at geographic expansion under plans for growth, we're very excited about this. Let me start with a few of the megatrends that are driving this business. First one is mobilization of developing countries. We have an advantaged position in many of the countries that you talk about all the times, the India's, the China's, if you will, Brazil. And we not only have capabilities in place, but we can leverage those, and we are. And I'll talk about that.

The second set of megatrends are all around changes to lubricant performance that are occurring because of increased needs for things like fuel efficiency, energy efficiency in this case. Emissions drive a lot of what happens to our OEMs and how they respond with technology. Lubricants are shaped based on that.

And so as emission regulations become more and more strict, performance requirements for lubes go up, more additive is used. And again, we benefit from that in conjunction with our customers. And then durability of equipment. If you're going to build a large diesel engine, you want to make sure it's protected with the right lubricant. And as changes occur technologically, performance requirements for lubes continue to increase."


So, while emerging market exposure and economic recovery are undoubtedly part of Buffett's rationale, it seems as though his primary thesis could be predicated on pricing power. After all, it's one of his favorite attributes of a business. To learn to invest like this legend, head to Warren Buffett's recommended reading list. And for wisdom from the man himself, check out the top 25 Buffett quotes.

Second Curve Sells Some CompuCredit (CCRT)

Tom Brown's hedge fund Second Curve Capital filed a Form 4 with the SEC regarding transactions in shares of CompuCredit (CCRT). Per the filing, Second Curve sold 300,000 shares of CCRT, with 175k shares being exited at $7.01 on March 15th and 125k shares dumped at $6.80 per share on March 16th.

After these sales, the hedge fund reported holding 3,980,630 shares of CCRT. They've been gradually selling shares since 2011 started, down from 4,260,630 held at the end of 2010. Readers will recall that Second Curve was buying CCRT back around $4.94 in September of last year. Other more recent activity out of the hedge fund firm includes acquiring Mercantile Bank (MBWM) shares.

Per Google Finance, CompuCredit is "a provider of various credit and related financial services and products to or associated with the financially underserved consumer credit market. The Company has contracted with third-party financial institutions pursuant, to which the financial institutions have issued general purpose consumer credit cards, and it has purchased the receivables relating to such accounts on a daily basis."

What We're Reading ~ 3/18/11

Watching documentary on financial crisis: Inside Job [Charles Ferguson]

Don't miss a 10% discount to global macro hedge fund event [MarketFolly]

Transcript of John Paulson's interview with the FCIC [ValueWalk]

Transcript of Warren Buffett's interview with the FCIC [Santangel's]

Barton Biggs: Valuations not stretched [ValuePlays]

What's a buck worth? [HedgeFundInvest]

Ten deadly sins of hedge fund managers [UCITS Hedge]

How investors turned the tables on hedge funds [Reuters]

Q&A: Investing in Japan [Gannon On Investing]

Good selection of linkfests for more financial reads [Barbarian Capital]

Why did Berkshire stop selling Moody's (MCO)? [Wide Moat Investing]

Greenlight Cap & Tiger Global sue Porsche [Bloomberg]

Bearish bets on Chinese reverse mergers [Barron's]

Collection of Seth Klarman's Baupost Group Letters: MUST READ

Seth Klarman of Baupost Group is largely regarded as one of the best investors of all time. When he speaks, everyone stops to listen. MarketFolly.com has been fortunate enough to come across a collection of vintage Baupost Group investor letters with dates ranging from December 1995 through June 2001.

While some of the investment specific information is obviously dated, the wisdom Klarman shares on how to evaluate markets is timeless. If you're looking for more recent market commentary from the value investor, we also posted up excerpts from Klarman's 2010 letter.

If you're unfamiliar with Baupost (shame on you), here's a brief description extracted from their December 1995 letter:

"The Baupost Fund is managed with the intention of earning good absolute returns regardless of how any particular financial market performs. This philosophy is implemented with a bottom-up value investment strategy whereby we hold only those securities that are significantly undervalued, and hold cash when we cannot find better alternatives. Further, we prefer investments, when we can find them at attractive prices, that involve a catalyst for the realization of underlying value. This serves to reduce the volatility of our results and de-emphasizes market movements as the source of our investment returns."

Before reading, keep in mind that these letters come from one of Baupost's smaller funds started in 1990 (as opposed to the main funds started in 1983). But still, valuable and rare commentary from the legendary investor. *** .pdf removed at request of Baupost's representatives *** To learn to invest like Baupost Group, check out Seth Klarman's recommended reading list. Be sure to also check out more recent letters from prominent investors like Warren Buffett's 2010 letter.

Byron Wien's Market Commentary: March 2011

Readers will be familiar with Byron Wien from his days at hedge fund Pequot Capital. Since then, he's moved on to The Blackstone Group and has penned his latest market commentary for March 2011 entitled, 'Off to a Good Start.'

It's a bit ironic that many market prognosticators have focused on how 2011 has started off well in their recent diatribes and then *boom* the month of March hits with a ramp in market volatility. Earlier, we pointed out hedge fund manager Crispin Odey's bullish outlook that he penned before things turned sour.

When everything in the market was 'fine and dandy', these respected gurus' commentary echoed the same tune. With increased fears, it will be intriguing to see if their next publications reflect a change in sentiment. While Wien has hinted at concern for the European region, it's obviously much harder to predict an earthquake/tsunami double-punch in Japan.


Byron Wien's March 2011 Market Commentary:

"Investors came into 2011 feeling constructive about the outlook. Forecasts of market performance expected the Standard & Poor's 500 to rise about 10% after a strong performance in 2010. The economy was projected to grow 3%, unemployment was thought to decline modestly and interest rates were likely to rise a bit but stay low, with inflation remaining tame. All of this was reflected in various measures of market sentiment which were at varying levels of optimism ranging from mild to extreme. Since by now we all have learned that the best time to buy stocks is when investors are despondent, savvy professionals were cautious in January, expecting a correction at least or perhaps a downturn lasting until the weather warmed.

If you believe as I do that the market was put on earth by God to make fools of the greatest number of people, it would not be surprising to you that stocks rallied throughout the early part of the year. The fundamental background was positive. Retail activity was firm, automobile sales were surprisingly strong, fourth quarter earnings were mostly beating expectations, the European credit crisis was dormant for the moment, state and local governments were making an effort to control expenses and initial unemployment claims were trending downward. There were some negatives: the Federal budget deficit was running at an unprecedented $1.5 trillion rate and the United States was likely to run up against its debt ceiling by March. Inflation was beginning to become a serious problem in the developing world, casting some doubt on the potential profitability of companies operating in those markets. Political upheavals in Tunisia, Egypt, Libya and Bahrain raised the issue of stability in that critical oil-producing region. The January unemployment report came in at 9.0%, but that was more because of people dropping out of the work force than new jobs being created. As we moved into February investor optimism remained undaunted and those who were cautious began to buy again, recognizing that it was futile to "fight the tape." Mutual fund buyers who had shunned equities in favor of bonds during 2010 bought more common stocks in January than in any month since 2003.

In February the economic background was mixed. Inflation, which had not been a problem because wage increases were rare and home prices were not increasing, suddenly became a concern as both consumer and producer prices rose more than expected. President Obama presented his budget and those looking for significant progress in reducing expenditures were disappointed. It appears that few in Washington are willing to make cuts in defense, or in Social Security, Medicare, Medicaid and other entitlements. Every budget hawk seems to focus on the discretionary component of the budget, especially foreign aid, earmarks, the Department of Education, etc. The entire discretionary component is 29% of the budget, so if all of these items were cut to zero, the budget deficit would still be over $1 trillion. It is clear that we are not going to make major progress in fiscal restraint without making adjustments in a wide range of previously sacrosanct programs. To do this Congress would have to reduce some benefits important to their constituents and run the risk of not being re-elected.

While most Americans recognize that we cannot run trillion dollar deficits indefinitely, few seem willing to make the sacrifices that would be necessary to bring expenditures more in line with receipts. For the past 60 years the United States government expenditures were about 20% of Gross Domestic Product (GDP) and tax and other receipts were about 18%, resulting in a 2% gap. Today expenditures are running about 25% of GDP and receipts are 16%, for a 9% gap. We have been fortunate that foreign lenders who have financed this gap have been willing to buy our Treasury bills, notes and bonds at historically low interest rates, but I do not believe we can count on this condition lasting forever. If we need a crisis to address this problem seriously, a sharp rise in interest rates might cause Congress and the electorate to recognize the need to make some serious program adjustments.

Looking at some troubled areas of the economy that may be improving, housing stands out. The January report on housing starts shows a significant rise, primarily because of multi-unit construction. As the economy improves, those with jobs feel more secure, family formations increase and housing demand steps up. As a result of low interest rates and the decline in house prices over the past few years, affordability has been on the rise, but it is only now beginning to become apparent in transactions. If the trend continues, this could be an important positive for the economy. Mortgage delinquencies are declining, but the overhang of homes for sale remains large. If home prices do improve at all, they are likely to do so gradually.

But there are other important signs of strength. The Institute for Supply Management purchasing manager indexes for both manufacturing and services are showing remarkable strength and exports are contributing to the growth of the U.S. economy as the developing world buys more of our goods. The consumer continues to spend. Although consumer confidence has been relatively flat, real consumer spending is back to pre- recession levels. Capital spending continues to exceed the levels of previous cycles as companies seek ways to improve productivity. The dark side of this is that much of the new equipment enables companies to reach their production and service goals with fewer workers, so unemployment remains high. I do expect the unemployment rate to decline this year into the mid-8% range, however.

Overseas, recoveries are taking place everywhere. Real growth in the Euro zone was almost 2% at the end of last year in spite of the financial problems in the southern tier countries. Real growth in Japan at the end of 2010 was almost 5%, helped partly by deflation there. This was substantially above the levels achieved earlier in the last decade. Industrial production is strong almost everywhere and retail sales have recovered sharply from the recession, but they have fallen back recently in Japan. Housing is weak across the globe. By now almost everyone recognizes that the engine of growth is shifting to the developing world, but some problems are emerging there as a result of rising commodity prices. Food is an important component of consumer prices (over 30% in China and Brazil and 47% in India) and pork and grains are surging. In India, for example, wholesale and retail prices have been increasing at an 8%–9% rate and the government has increased interest rates in an attempt to dampen economic activity and prices. As a result projected real growth is expected to decline from close to 9% to the 6%–7% range. A similar inflation problem exists in China, where the government is taking even more aggressive monetary steps to control prices. Perhaps Vietnam is too small to be important, but prices there are increasing more than 20% and the base lending rate is only 9%. The result of all of this monetary restraint is that the performance of the equity markets of the emerging countries has been lagging behind Europe and the United States. It may not be here just yet, but I think a buying opportunity is developing. China has already begun to do better.

One of the worries at the beginning of the year was that the financial crisis in Europe would reemerge. I was hopeful that a combination of austerity measures, higher taxes and growth would be combined with transitional aid from the International Monetary Fund, the European Union and Germany to provide a period during which the stress could be reduced. I was also encouraged by the lack of public protest against the measures various governments were taking to bring their budget deficits and overall debt into line. Recently there have been reasons to be concerned. Angela Merkel's political party lost an election in Hamburg, which was a setback for her. Merkel's leadership is essential to the workout period for the weaker economies and to fill that role she must maintain her political strength at home. Interest rates on the 10-year bonds of Portugal, Ireland and Spain have risen recently, reflecting increased uncertainty, and credit default spreads are rising. I remain optimistic about Europe for the intermediate term but this is a situation that requires monitoring. One area where some good news is appearing is the financial condition of state and local governments. After dropping to a problematic low at the end of the recession, personal income receipts at the state level have been increasing. Even New York City reports that tax revenues have been coming in $2 billion higher than projected three months ago. While there are still severe problems in a number of troubled states like New York, California, New Jersey and Illinois, I believe the situation is improving. I do not see similar progress at the Federal level.

There is considerable controversy over whether the apparent strength of the United States economy is a result of the QE2 monetary easing program. Many believe that much of the money the Fed injected into the economy went into the stock market. There are plenty of Bernanke critics around who will argue that the economy was starting to recover on its own and the second round of easing was unnecessary at best and dangerous at worst. After all, adherents of Milton Friedman believe that inflation "is always and everywhere a monetary phenomenon," but while the recent reports on the consumer price index are showing a rise, we are a long way from what we experienced in the 1970s. In my view you need wages and housing prices to be rising for inflation to become a problem. House prices are still declining and it is doubtful that wages will rise significantly with the unemployment rate at 9%; it was 6% in 1974 when inflation was becoming a severe issue.

The Federal Reserve began QE2 last fall because the prospect for passing another fiscal stimulus program seemed dim based on the temper of the populace, questions about the original Obama stimulus program and the Republican shift in Congress. Monetary easing was the only tool left in the box to deal with the problem of persistent high unemployment, and the current easing is likely to continue until we see the jobless rate drop comfortably into the 8% range. At that point the Fed may begin tightening, but should we be so fearful of that? Looking at past cycles, according to Strategas Research, the Standard & Poor's 500 gained an average of 15.6% in the twelve months before the first tightening and 4.8% in the six months before tightening began. Even after the first tightening the S&P gained 8% in the first six months and 3.7% in the first year. What matters most is economic momentum and earnings growth. If the United States economy is going to grow at 4% or better in 2011 and not slip back into recession in the following year, then the likelihood of the market continuing to deliver positive performance is high. Excessively bullish sentiment will surely produce periodic pullbacks, but in the 84 years since 1926 the S&P 500 has risen more than 10% 48 times, more than half the time, and with the present favorable outlook I think 2011 will fall in that group. "


For more market commentary, scroll through excerpts from Seth Klarman's latest letter as well as Warren Buffett's annual letter.

10% Off Next Week's Global Macro Hedge Fund Event in New York

There are only a few seats left for next week's Global Macro Hedge Fund event in New York and Market Folly readers receive a 10% discount.

On March 23, FINforums brings together top hedge fund managers, investors, political scientists and economists to discuss geopolitical risk and its effect on investing in global macro funds. Topics include an emerging markets outlook, an in-depth look at the crisis in the Middle East, and a discussion about US and European fiscal policies and how they impact investment decisions.

Event: Global Alpha and Geopolitical Risk
Date: Wednesday, March 23, 2011
Venue: Princeton Club, New York City
Cost: $195 (use discount code FOLLY for an additional 10% off)
Organizer: FINforums
More Info: Click here for more info
Register: Click here to register

Highlights of the event include a one-on-one fireside chat between hedge fund legend Barton Biggs and award-winning broadcast journalist John Seigenthaler, and a keynote address by leading Middle East expert Gary Sick (see full agenda).

Speakers Include:

- Barton Biggs, Founder and Managing Partners, Traxis Partners
- Prof. Gary Sick, Adjunct Prof of Intl and Public Affairs, Columbia University
- Caroline Bentz, Managing Director, Parker Global Strategies
- Amer Bisat, Partner and Portfolio Manager, Traxis Partners
- Nicholas J. Colas, Chief Market Strategist, ConvergEx Group
- Bertrand Delgado, Senior Research Analyst, Roubini Global Economics
- Justin Dew, Sr. Managing Director, Welton Investment Corp
- Kenneth Kuhn, Managing Director, Global Capital Investments
- John Seigenthaler, Former NBC News anchor and current CEO of Seigenthaler PR-NY will serve as chair and moderator

For questions, please contact Deirdre Brennan at (212) 966-0047 or dbrennan@finalternatives.com

The event is sponsored by NorthPoint Trading Partners, Ambrose Group, Chivas, Hedge Fund PR, Seigenthaler Public Relations and FINalternatives.

Jeffrey Ubben of ValueAct Capital on Activist Value Investing

Opalesque interviewed Jeffrey Ubben of hedge fund ValueAct Capital and we wanted to highlight his thoughts on activist value investing and how it has evolved. Keep in mind that Ubben will be sharing his latest investment ideas at the Value Investing Congress in May (Update: you can see a summary of his presentation here).

In the video, Ubben touches on ValueAct Capital's strategy and how they change companies from the inside by working closely with them. Prior to founding the firm, he was a Managing Partner at Blum Capital Partners and before that managed the Fidelity Value Fund.

ValueAct typically holds 15-20 positions in its portfolio and is usually very active in the boardroom in about a third of them. ValueAct's partners have honed their skillset to include experience in boardrooms and Ubben argues that they resemble a Private Equity approach much more than other firms. You can see some of ValueAct's recent portfolio activity here.

In the interview, he touches on his investment approach as well as the cons of media involvement and proxy contests when running an activist campaign. Embedded below is Part 1 of Jeffrey Ubben's interview with Opalesque (email readers come to the site to watch):




And here is Part 2 of Jeffrey Ubben's interview:



You can hear Ubben's latest stock picks at the upcoming Value Investing Congress in May. Click here for a discount to the event (hurry because the discount expires tonight at midnight!)

Whitney Tilson Explains LECG Position (XPRT)

Back in late February, we highlighted that Whitney Tilson's hedge fund T2 Partners had gone activist on LECG Corp (XPRT). Since then, shares have fallen dramatically and they sold their entire position. In his February letter to investors, Tilson explains their thought process behind the investment and lessons learned:

"It was a historic day for us on the last day of February – but not in the way we like: one of our positions declined by 80% in a single day. You might think that such a decline is, ipso facto, proof of a mistake, but we’re not so sure (and that’s not just because we had a good day and month). Allow us to explain…

LECG is a specialized consulting firm that “conducts economic and financial analyses to provide objective opinions and advice that help resolve complex disputes and inform legislative, judicial, regulatory and business decision makers.” Our investment was based on the belief that LECG could successfully integrate recent acquisitions into a profitable business structure. Given the company's market capitalization of approximately $40 million, we felt that we had a reasonable margin of safety imbedded in the company's $109 million in Accounts Receivable, offset by $26 million of net debt.

The company's distressed stock price, under $1, was due to a default on the existing debt. Given the quantity and quality of the receivables, we believed that the default was a short-term issue and that LECG would be able to refinance debt on a secured basis, supported by the Accounts Receivable, in which case the stock could easily be a multi-bagger.

Much to our surprise and dismay, however, LECG instead announced what is effectively a plan of liquidation. We don’t know why the company pursued this path, though it is possible that this route preserved compensation agreements for employees at the expense of existing shareholders. Given the rapid execution of the liquidation, we believe the equity will end up being worthless so we sold our entire position.

In light of this permanent loss of capital, why aren’t we certain that this was a mistake, as Netflix clearly was? Because it’s possible that we made a high-expected-value bet, but just got unlucky. Investing is a probabilistic business so it does not necessarily follow that every time you lose money, you made a mistake (and, conversely, every time you make money, you made a good investment). This is very simple and, to us, obvious, but is very poorly understood.

Mispriced Options

LECG was a classic mispriced option, a type of investment that violates the rules of classic value investing, but with which we’ve had extraordinary success over time.

Warren Buffett is reported to have said that there are two fundamental rules of value investing: 1) Don’t lose money; 2) See Rule #1. We disagree. While it’s certainly true that investors should focus primarily on avoiding losses, we happily make investments in which we know there’s a decent chance – even a likelihood – that we’ll lose most or all of our money, as long as the upside is great enough to offset this risk. For example, if you could invest $100 in something that had a 70% chance of being worthless, but a 30% chance of being worth $1,000, would you invest? Of course, because the expected value is $300, or a 3x return.

But how much of your portfolio would you invest in this type of mispriced option, given that there’s a 70% of losing all of your money and looking (and feeling) like a fool? There’s no easy answer, but for us, in this situation, the answer is maybe 1% of our capital – and we’d look hard to find other similar investments so we could have a portfolio approach.

This is what we did, for instance, when we invested in the warrants of a handful of SPACs in late 2008 and early 2009 (and even created a side fund called the T2 SPAC Fund). By carefully selecting only a handful of the SPACs with the best sponsors and structure, we thought that each SPAC had a 50/50 chance of getting a deal done, in which case the warrants were almost certain to rise 5-10x. As it turns out, all but one SPAC got a deal done and we profited handsomely.

Outside of SPACs, other mispriced options that have worked out very well for us include our biggest winner ever, General Growth Properties shortly after it filed for bankruptcy, when the stock was around $1, TravelCenters of America, which rose 96.2% last month, Border’s bouncing from $1 to $3 in each of the past two years, and (many years ago) Denny’s.

But some percentage of these investments will be wipeouts like LECG, the Trian SPAC, and Sirva. That’s okay – it comes with the territory."


So, it's interesting to see one fund manager's approach to position sizing with these types of investments. Risk management is obviously a prime tenet of investing and this is a great case study. In other recent posts on this hedge fund, we detailed how T2 covered their Netflix (NFLX) short position. Be sure to also check out other hedge fund letters we've posted up.

2nd Annual March Madness Bracket Contest: Free Entry

It's that time of year again. We're pleased to announce the second annual Market Folly March Madness contest now that the NCAA Men's College Basketball Championship is here. So, fill out your brackets!

It is free to enter. To participate, you will need a free CBS Sports account. Click here to join our free contest.

Group Name: Market Folly Madness
Password: mf

If you signed up last year, your CBS Sports account should have automatically re-joined the contest for this year. You must submit your picks before Thursday, March 17th. Best of luck to everyone participating!

Crispin Odey Still Bullish: Latest Hedge Fund Commentary

Crispin Odey, founder of hedge fund firm Odey Asset Management, is still quite bullish. Odey's previous commentary from November 2010 notes that he was optimistic on stock markets and that stance is maintained today with his most recent commentary from January 31st.

Given the recent bump in market volatility since he published this, it will be interesting to see if Odey has held steadfast in his views. Before we delve into his latest stance, we wanted to highlight a recent purchase by his firm:

Due to trading on February 24th, Odey have disclosed a new purchase in London listed stock, Xchanging (LON: XCH). They now own the equivalent of 7.13% of Xchanging's outstanding shares via CFDs (see our primer on CFDs: contract for difference). Odey's flagship European fund is holding 4.74%.

Per Google Finance, "Xchanging plc provides processing services to the banking and insurance industries, as well as procurement, finance and accounting, and human resources services across industries."

"Current Outlook

Dylan Grice at Société Générale is pessimistic about markets. The reasons he gives are:

- Developed economies' governments are insolvent.
- There is too much debt around.
- China's economic model is biased towards misallocating resources.
- China and the USA are in an early arms race.
- Bottlenecks are developing in key commodity markets.
- The only thing central banks are good at are creating bubbles.
- Most people think these things are unimportant.
- They might be right.

It is odd to find oneself agreeing with everything he writes and yet so disagreeing with his conclusion. Such are the bricks that make up the wall of worry we need to climb. My role, as I see it, is to protect your money when it is dangerous and make as much money as I can when the opportunity presents itself. This opportunist approach means being a different kind of investor at different times. As of today it means being very long of stock markets, in Europe and the USA, and short bond markets. Why fight the Fed?

Most investors are now waking up to the fact that we are in the midst of a global boom, which is taking key commodities very much higher. Bread riots are being seen in many countries and will intensify but the unseen effect is that inflation in emerging markets is remaining at four times the inflation rate in the developed economies. Inflation may be painful in the developed world, bringing with it a fall in living standards but it also brings a welcome competitive convergence, which will price people back into jobs eventually. When that happens, inflation in the West will get out of control, but for now we have the best of all worlds: inflation rising, interest rates unlikely to rise immediately and an investment boom in its infancy.

Europe is a microcosm of these trends, Germany is now booming. Profits will surprise enormously to the upside. Wage claims in Germany will start to spiral up, but the boom in the domestic economy will provide rich pickings for the depressed southern economies.

For particular reasons, related to bank funding pressures in Ireland and Spain, Europe is the only area likely to see rates rising this year. December's Euribor future is pricing in a 1% rise in interest rates by year end. I think rates could be up by 2%. The authorities in Germany are not going to enjoy the boom they are going to get. They will be pleased to find their southern partners, for reasons of their own, to be equally happy to see rates rising.

Will it hurt the stock markets? No. History is quite clear that not until rates hit 6% do equities get frightened by inflationary pressures. That seems a million miles from here.

This year has started off very well and my own forecast is that there will not be the same volatility as there was last year."

Again, keep in mind that Odey penned the above on January 31st, 2011. Since then, market volatility has certainly elevated so it will be interesting to see if his optimism is wavering in his next commentary.

Overall, Odey has been quite bullish for some time now and it seems as though he'll maintain that outlook until more rampant signs of inflation are evident. For more on this hedge fund, check out Odey's short position as well as Odey's previous commentary.

What We're Reading ~ 3/11/11

Financial Shenanigans: How to detect accounting gimmicks & fraud [Howard Schilit]

Biggest potential headwinds for stocks in 2011 [ReformedBroker]

Review of the book on equity research [Research Puzzle]

Trapeze Asset Management's latest letter [MyInvestingNotebook]

A only-somewhat-complete list of the 25 best financial "blogs" [TIME]

And on that note: the professionalization of financial blogs [Abnormal Returns]

Top hedge funds betting on plastics [Reuters]

David Tepper is mainly concerned about Middle East blowing up [Institutional Investor]

See earlier: Tepper cautious but optimistic [MarketFolly]

Carl Icahn returning outside investor capital [Dealbook]

Bill Gross dumps Treasuries [Bloomberg]

A few months old, but great interview with global macro manager Renee Haugerud [Galtere]

James Montier on the seven immutable laws of investing [Docstoc]

Hugh Hendry's presentation on why he's shorting China [BusinessInsider]

Tepper may invest in other hedge funds [Marketwatch]

Behind the curtain at D.E. Shaw [WSJ]

Nokia (NOK) and its risky strategic bet [Can Turtles Fly]

Forbes Billionaire List 2011: Top Investors That Made the Cut

Forbes is out with its billionaire list: 2011 edition. This year, the list features 1,210 billionaires with a total net worth of $4.5 trillion. Digest that for a second. What might surprise you even more is the number of prominent investors that grace this accomplished list.

Notable Moves From Last Year

Last year in a quick scan, we highlighted 36 top investors on Forbes' list. This time around, we found 48 prominent investors. The top three slots remain unchanged from 2010 with Carlos Slim Helu, Bill Gates, and Warren Buffett occupying their same respective positions. It should come as no surprise that many of the founders of the top 10 biggest hedge funds also grace this list of billionaires.

Moving Up: John Paulson moved up six slots on the list by adding to his fortune by 33% (+$4 billion). Appaloosa Management founder David Tepper jumped up 50 spots on the list as he boosted his net worth by almost 43% to $5 billion.

Moving Down: Energy trader John Arnold's fortune shrank by $0.7 billion and as a result he dropped 124 spots. David Shaw's net worth declined by 12% and he fell 166 slots on Forbes' list. Wesco and Berkshire Hathaway veteran Charlie Munger somehow saw his savings swoon by 41% as he slid 558 spots.

Net Worth Up, Rank Down: George Soros saw his personal warchest grow by only $500 million (we use the term 'only' very loosely) and thus was leapfrogged by numerous other investors on the list. Paul Tudor Jones found himself in a similar scenario where he increased his net worth by $100 million but slipped 39 rungs on the ladder. It appears as though the rich were simply getting richer faster than these two hedge fund titans.


Top Investors on Forbes' Billionaire List
(Click links for recent activity from each manager):

1. Carlos Slim Helu $74b: Made money in telecom but still a large investor
2. Bill Gates $56b: Invests via his Cascade vehicle
3. Warren Buffett $50b: Berkshire Hathaway (see his reading list)
26. Prince Alwaleed $19.6b: Famous for his investment in Citigroup
39. John Paulson $16b: Hedge fund Paulson & Co (see his year-end letter)
46. George Soros $14.5b: Soros Fund Management
57. Paul Allen $13b: Made money via Microsoft but invests (Vulcan)
61. Carl Icahn $12.5b: Recently announced he's returning outside capital
74. Jim Simons $10.6b: Renaissance Technologies Medallion Fund
114. Steven Cohen $8b: SAC Capital
162. Ray Dalio $6b: Bridgewater Associates (see his recent interview here)
169. Stephen Schwarzman $5.9b: Blackstone Group
208. Sam Zell $5b: Real estate and private equity
208. David Tepper $5b: Appaloosa Management (cautious but optimistic)
235. Bruce Kovner $4.5b: Global macro hedge fund Caxton Associates
268. Robert, Daniel, & Dirk Ziff $4b each: Brothers from Och-Ziff
281. Henry Kravis $3.9b: Co-founder of KKR
304. Eddie Lampert $3.6b: ESL Investments (runs Sears Holding Co)
310. Leon Black $3.5b: Founded private equity firm Apollo Management
336. Paul Tudor Jones $3.3b: Tudor Investment Corp
336. Daniel Och $3.3b: Och-Ziff
336. John Arnold $3.3b: Energy trader of Centaurus Capital
362. Peter Kellogg $3.1b: Wall Street specialist firm Spear, Leeds & Kellogg
459. Stanley Druckenmiller $2.5b: His Duquesne Capital recently shut down
459. Mark Cuban $2.5b: Made his fortune in technology but is avid investor
512. Julian Robertson $2.3b: Tiger Management founder
512. Ken Griffin $2.3b: Citadel Investment Group founder
540. David Shaw $2.2b: Founder of D.E. Shaw & Co
540. Philip Falcone $2.2b: Harbinger Capital focusing on 4G network
564. Bill Gross $2.1b: PIMCO's bond vigilante
651. Wilbur Ross $1.9b: Specializes in leveraged buyouts
651. Izzy Englander $1.9b: Millennium Management
692. Leon Cooperman $1.8b: Omega Advisors (see his recent interview)
692. Alan Howard $1.8b: Hedge fund firm Brevan Howard
736. Louis Bacon $1.7b: Global macro hedge fund Moore Capital Management
736. Ken Fisher $1.7b: Fisher Investments
736. Glenn Dubin $1.7b: Highbridge Capital
736. Stephen Mandel $1.7b: Hedge fund firm Lone Pine Capital
782. Richard Chilton $1.6b: Chilton Investment Company
833. Michael Price $1.5b: MFP Investors
833. James Dinan $1.5b: York Capital Management
833. Peter Thiel $1.5b: Made fortune in tech, runs hedge fund Clarium Capital
833. Marc Lasry $1.5b: Avenue Capital
879. T. Boone Pickens $1.4b: This energy maverick also manages a hedge fund
993. Henry Swieca $1.2b: Highbridge Capital
993. Howard Marks $1.2b: Oaktree Capital
1140. Charlie Munger $1b: Berkshire Hathaway
1140. Nelson Peltz $1b: Trian Fund Management


Overall, prominent investors comprise around 4% of this exclusive list. For more recent investor accolades, be sure to also check out the top 10 biggest hedge funds in 2010 as well as the list of 2010 hedge fund returns.

Value Investing Congress Discount Expires Next Week

Just a reminder that the opportunity for our readers to receive a sizable discount to the Value Investing Congress expires on March 15th. After that, the price will go up substantially. So, take advantage of the low prices by clicking here for the discount.

The event takes place on May 3rd & 4th in Pasadena, California. Here's the full list of speakers:

- Steven Romick (First Pacific Advisors)
- Jeffrey Ubben (ValueAct Capital)
- David Nierenberg (D3 Family Funds)
- Rahul Saraogi (Atyant Capital India)
- Michael Kao (Akanthos Capital Management)
- Ori Eyal (Emerging Value Management)
- KKian Ghazi (Hawkshaw Capital Management)
- Whitney Tilson & Glenn Tongue (T2 Partners)

As always, the event is a place to hear some great investment ideas and to network with tons of finance professionals. Take advantage fast because this discount expires next week. Click here to save money on registration to the Value Investing Congress.

Roberto Mignone Buys Cott (COT)

Roberto Mignone's hedge fund firm Bridger Management just filed a 13G with the SEC regarding shares of Cott (COT). Due to portfolio activity on February 25th, Bridger has disclosed a 6.8% ownership stake in COT with 6,400,000 shares. This is a brand new position for the hedge fund and you can see the rest of Bridger's investments here.

This is now the second major hedge fund to invest in Cott over the past few months. As we've previously singled out, David Gallo's Valinor Management started a stake in the company back in December and recently increased its Cott position. The interesting thing here is that prior to founding Valinor, Gallo worked at Bridger. As such, the fact that both hedge funds have recently acquired positions in the same company isn't that surprising.

The other unique aspect of this investment is that shares are largely trading around the levels where these managers purchased COT. While disclosures filed with the SEC are time-lagged and on a slightly delayed basis, this is a rare opportunity where shares haven't been massively bid up from the level where the hedge fund established a position.

COT recently reported earnings largely in-line with estimates. Analysts are expecting continued margin pressures (cost inflation) at the company. On the positive side, they also expect increased synergies and the pay-down of debt to help offset this.

Per Google Finance, Cott Corp is "a non-alcoholic beverage company and a retailer brand soft drink provider. In addition to carbonated soft drinks (CSDs), its product includes clear, still and sparkling flavored waters, juice-based products, bottled water, energy-related drinks and ready-to-drink teas."

David Gallo's Valinor Management Increases Clearwater Paper (CLW) Position

David Gallo's hedge fund firm Valinor Management recently added to its position in Clearwater Paper (CLW). Due to portfolio activity on February 24th, Valinor now shows a 5.1% ownership stake in CLW with 581,380 shares.

This is a slight increase in their holdings as they owned 505,106 shares at the end of 2010. As such, they've boosted their position size by 15%. We've detailed some of Valinor's other portfolio activity as well.

In general, the paper and packaging industry has garnered increased interest from hedge funds as of late. Dan Loeb's hedge fund Third Point explained why in a recent letter, citing four factors for the industry's upheaval:

"1. The expiration of the (black liquor) tax credit caused the closure of many marginal paper plants and led to much higher paper pricing for the survivors in 2010-11.

2. Paper can only be recycled only a limited number of times before the fiber wears out, further increasing OCC (recycled paper) pricing.

3. Softwood pulp producers or those who are vertically integrated with their own softwood pulp enjoy a substantial cost advantage.

4. The combination of industry consolidation and capacity reduction has led to many paper grades currently running at +90% utilization, a level that gives them the flexibility to raise prices."


Be sure to read Third Point's full rationale on the paper industry. Hedge funds have also been active in Smurfit-Stone (SSCC) as the paper company received a takeover offer, as well as Abitibibowater (ABH), another paper company that just emerged from bankruptcy.

Per Google Finance, Clearwater Paper is "a producer of tissue and paperboard products in the United States. The Company’s products are manufactured in the United States and utilize primarily wood pulp. The Company operates in three segments: Consumer Products, Pulp and Paperboard, and Wood Products."

Scout Capital Orders More Domino's Pizza (DPZ)

James Crichton and Adam Weiss' hedge fund Scout Capital Management recently updated its position in Domino's Pizza (DPZ). Per portfolio activity on February 23rd, Scout has now revealed a 5.07% ownership stake in DPZ with 3,040,000 shares.

This recent SEC 13G filing marks almost a 21% increase in their position size since the end of last year. At 2010 year-end, Scout previously owned 2,519,600 DPZ shares.

For other activity from the hedge fund, we've detailed some of Scout's other positions here. Signs of a 'fast food' theme are evident in Scout's portfolio as they also own Yum! Brands (YUM) and McDonald's (MCD), the latter in size.

Scout manages over $4 billion and was founded in 1999. Before founding Scout, Weiss worked at Dan Loeb's Third Point and earned his MBA from Columbia University and undergraduate degree from Harvard. Crichton previously worked at Zweig-DiMenna and earned his MBA at Harvard.

Per Google Finance, Domino’s Pizza, Inc. (Domino’s) is "a pizza delivery company in the United States. The Company operates through a network of 8,999 company-owned and franchise stores, located in all 50 states and in more than 60 international markets. It operates in three segments: domestic stores, domestic supply chain and international."

Top 10 Biggest Hedge Funds in 2010

AbsoluteReturn+Alpha is out with its 2010 year-end survey of the top ten hedge funds in the Americas. Their findings show that American hedge funds manage a combined $1.297 trillion, up 10% from the year prior. However, this still falls short of the 2008 peak level of $1.675 trillion before the financial crisis.

The Top Ten Hedge Funds in the Americas

1. Bridgewater Associates: $58.9bn AUM
2. JPMorgan Asset Management: $45.5bn
3. Paulson & Co: $36bn
4. Soros Fund Management: $27.9bn
5. Och-Ziff Capital Management: $27.6bn
6. BlackRock: $26.6bn
7. Baupost Group: $23.4bn
8. Angelo, Gordon & Co: $22bn
9. Farallon Capital Management: $21.5bn
10. King Street Capital Management: $19.9bn


Possibly the most astonishing fact here is that in 2010 the big... got even bigger. Ray Dalio's Bridgewater Associates increased its AUM by $15.3 billion. Dalio gave a rare interview yesterday that's definitely worth listening to. His Pure Alpha Fund II gained 44.8% last year, quite the performance when you compare it to other 2010 hedge fund returns.

Of the hedge funds featured on the list, we provide updates on the portfolio activity of four of them:

- Seth Klarman's Baupost Group has been active in commercial real estate and we just posted up an excerpt from his year-end investor letter.

- Paulson & Co has been focusing on restructured equities as noted in their year-end letter.

- Farallon Capital focuses on risk arbitrage and their investments have been featured in our newsletter.

- You can also view the latest portfolio activity from Soros Fund Management here.

Bridgewater's Ray Dalio: Rare Interview

Ray Dalio of $58.9 billion hedge fund Bridgewater Associates gave a rare television interview yesterday on CNBC so we wanted to feature his comments on a myriad of topics. His Pure Alpha II fund returned 44.8% last year and is the largest hedge fund firm in America.

On the topic of US equities, Dalio said that they, "first are still comparatively cheap. But more importantly, the flows are beneficial to them because US equities benefit from currency depreciations. I think, as I say in 2012, the developed countries' currencies will devalue in relationship to the emerging countries' currencies."

So, it appears as though Dalio sees equities benefiting, at least in the near-term. The last time we saw Dalio's elongated comments on markets back in February 2009, he was claiming it would soon be the "buying opportunity of the century" and he was right.

His thoughts on weakening currencies are intriguing given that he also thinks gold is under-appreciated here. This is largely the thesis John Paulson's gold fund is predicated upon, so they share this viewpoint. Dalio thinks gold should garner at least a portion of your portfolio, at the very least for diversification and risk reduction purposes.

Dalio also had a good quote on the topic of thinking for yourself, saying, "in order to make money in the market you have to be an independent thinker. And I think also creative, you have to be willing to make mistakes. And so the process is that anybody in the company, if anything doesn't make sense to them, that they can bring up what doesn't make sense to them in a non-hierarchical way and look at whether it's true or not and what we should do about it. We particularly like looking at mistakes or weaknesses that we have in order to get stronger."

He raises a good point and many prudent investors have honed in on learning from mistakes over the years.


Embedded below is Dalio's interview (email readers will need to come to the site to view):



For thoughts from more great hedge fund investors, today we've also posted up an excerpt from Seth Klarman's 2010 year-end letter.