What We're Reading ~ 5/6/11

Cash is king versus cash is trash [Abnormal Returns]

Good summary of the recent Value Investing Conference in Omaha [Motley Fool]

Looking back at Clarium Capital's descent [AR+Alpha]

Takeaways from a conversation with NXPI's CEO [Breakout Performance]

Joel Greenblatt: value wins [Reformed Broker]

How Joel Greenblatt turned hedge fund into retail business [New Rules of Investing]

Focusing on spin-offs in investing [Geoff Gannon]

Notes from Chicago Booth's distressed investing conference [Distressed Debt Investing]

Best finance blogs in Canada [Globe & Mail]

Very in-depth research on Advanced Battery Technologies (ABAT) (.pdf) [Prescience Funds]

George Soros' FCIC testimony [ValueWalk]

How to pick mutual funds [World Beta]

Contrary to David Einhorn: Best Buy (BBY) not cheap enough [Schn1eck7]

Endowments & Foundations return to hedge funds [FINalternatives]

Xerion's Arbess says gold is 'one trick pony' [Marketwatch]

New hedge fund launches up 51% since 2009 [HedgeCo]

David Sokol boosts stake in Middleburg Financial [WSJ]

How social media is changing investing [Milken Institute]

Speaking of social media, follow @marketfolly on [Twitter]

Court clears rule on disclosing creditor data [WSJ]

How to get good at making money [Inc]

Value Investing Congress Notes: Jeffrey Ubben, Claude Leveille, Michael Kao

Yesterday we posted up a summary of the Value Investing Congress' first day featuring speeches by Howard Marks, Steve Romick, Whitney Tilson and more. Here are some notes from day two of the event:

Jeffrey Ubben (ValueAct Capital): This activist investor only makes 3 or 4 new investments each year and their average holding time is 3 years. ValueAct says that their biggest advantage in the markets is their ability to truly focus on the long-term.

Ideally, they look for companies with solid cashflow during both economic prosperity and troubled times. Their activist strategy really places focus on management teams and they've been involved in numerous CEO changes. Interestingly enough, ValueAct doesn't do any shorting.

Ubben's newest position is in Motorola Solutions (MSI). Investors will recall that the former Motorola was split into two: MSI and then Motorola Mobility (MMI). ValueAct likes MSI due to its improving margins and the fact that it is still growing through a down cycle. Also, the company's cash currently represents 40% of market cap. For more on this manager, head to our post on ValueAct's activist strategy as well as some of their recent portfolio activity.



Claude Leveille (Courant Investment Management): Leveille seems to be a contrarian as he focuses on avoiding the 'herd'. We've of course talked about the hedge fund herd mentality numerous times before. Some years Leveille does as few as 3 or 4 trades, noting that he is extremely patient to wait for the fat pitches. Courant uses no leverage and only holds long positions.

One fat pitch that Courant swung at was the 10% position he took in BP (BP) after the Gulf oil spill with an average price of $31. He believed that the market overreacted to the news and has been correct as shares currently trade around ~$44 per share. We also documented how Whitney Tilson's T2 Partners also bought BP during the spill, taking advantage of the carnage (you can see their presentation on BP here). And then this year, well after the oil spill, David Einhorn still saw value as his Greenlight Capital also bought BP.

Courant aligns its interests with investors by employing a modified fee structure. Leveille says that the typical hedge fund fee structure of a 2% management fee and 20% performance fee "grossly misaligns interests." As such, he has implemented a 0.75% management fee and then a 15% performance fee over a 5% hurdle. Also, the performance fees are not extracted, but rather remain in the fund itself.

Leveille says that the best investments are the ones that are simplest to understand. This is reminiscent of Warren Buffett's approach of only buying things in your "circle of competence." Leveille listed some of his mistakes as investor such as: not concentrating positions enough, going outside of his circle of competence, selling too early, and holding too much cash.

And speaking of cash, Courant currently has around 25% of assets parked there. Leveille has been buying South Korean equities and also US large caps in the healthcare sector. He also mentioned that he currently does not have any investments in gold, bonds, or the euro. As far as inflation hedges go, he thinks that buying companies with high return on equity (ROE) can help battle the printing presses.



Michael Kao (Akanthos Capital Management): Sticking briefly with the theme of protecting from inflation, Kao recommended going long the Hong Kong dollar as a form of protection. In terms of general investment opportunity, Kao sees perpetuity options as an attractive bet, pointing to GSE preferreds as an example. He also mentioned that he learned an early lesson to be 'long optionality' as a portfolio lined with asymmetric payoffs is a solid strategy.

Akanthos Capital focuses on convertible, capital structure, and event-driven arbitrage. Prior to founding Akanthos, Kao co-founded the arbitrage strategies group at Canyon Capital Advisors. He holds a B.S. in electrical engineering and computer science from the University of California at Berkeley and an MBA from the Wharton School at the University of Pennsylvania.



Jonathan Friedland (Porter Orlin): Friedland's presentation focused on American value investors hunting for value abroad. His first idea was Droga Raia (SAO: RAIA3), a retail drug store operator in Brazil. His second pick was Coal India (BOM: 533278), a non-coking coal and coking coal producer. Lastly, he mentioned Television Broadcasts Limited (HKG: 0511), a program production, licensing, and distribution company (it also trades as an ADR on the pink sheets as TVBCY). Friedland is the portfolio manager for Porter Orlin's Amici Global funds and previously worked at hedge fund Zweig-Dimenna.

For more coverage of this event, be sure to check out our summary of the Value Investing Congress from the first day's speakers.

Third Point Reveals Technicolor Position: Latest Exposure Levels

Dan Loeb's hedge fund Third Point returned 1.4% in April and is now up 10.1% for the year. His Offshore Fund has returned 19% annualized, manages $6.8 billion, and recently closed to investors.


Equity Exposure

As of the end of April, Third Point's largest net long equity exposure was in the consumer sector at 10% and energy at 9.5% according to their latest monthly factsheet. Their overall equity exposure is 60.2% long, -13.4% short, leaving them net long 46.8%. This marks a slight increase in net long exposure from last month, up 4.6%. In this arena, Third Point is largely focused on spin-outs.

Credit Exposure

Third Point is overall 29.4% net long credit with their largest exposure coming from mortgage backed securities at 17.1% and distressed at 11.9%. These levels remain largely the same from last month. They also remain short government credit at -4.7%.

Top Positions

- Gold
- Delphi Corp
- El Paso (EP)
- NXP Semiconductor (NXPI) ~ multiple securities held
- Technicolor (TCH) ~ multiple securities held

This is the first time we've seen a mention of Technicolor in their portfolio. Notably absent from their top positions this time around is Chrysler, which was their third largest holding last month. Delphi continues to be a top holding for Third Point and a few days ago we highlighted that David Einhorn's Greenlight Capital bought Delphi recently as well.

Third Point's winners in the past month include gold, LyondellBasell (LYB), NXPI, Delphi, and El Paso (EP). Losing positions in April include short A, Icelandic Banks (debt), CVR Energy (CVI), Sunoco (SUN), and NewPage.

You can read Third Point's theses on CVR Energy and El Paso here.

Whitney Tilson's Presentation on St. Joe (JOE) & Howard Hughes (HHC)

Yesterday at the Value Investing Congress, T2 Partners founder Whitney Tilson presented a short of St. Joe (JOE) and a long of Howard Hughes (HHC). You can view a summary of the Value Investing Congress here, but we also wanted to post up Tilson's actual presentation.

St. Joe (JOE) is currently his hedge fund's largest short position. They've elaborated on David Einhorn's presentation on JOE by evaluating the company's WindMark assets and argue they're overvalued. T2 says, "in summary, WindMark (like many of St. Joe's developments is a ghost town. The only restaurant has closed, as have all but one retail shop. Virtually no construction is going on, sales of lots are few and far between, and there is huge shadow inventory."

T2 is also long Howard Hughes (HHC), a spin-off from General Growth Properties (GGP) that contains the developmental real estate assets. Tilson argues the company has attractive risk/reward, a solid management team (with Pershing Square's Bill Ackman as Chairman), and a strong balance sheet that provides protection. He thinks the company is worth anywhere from $77-141 per share on the low and high ends, respectively.

Embedded below is T2's full presentation on JOE and HHC (email readers come to the site to view it):



Be sure to also check out a summary of the Value Investing Congress.

Value Investing Congress Summary: Marks, Romick, Tilson, Leonard & More

Below is a summary of yesterday's Value Investing Congress in California. Tomorrow we'll provide a summary of day two so if you haven't already, make sure to sign-up to receive our free updates via email.


Howard Marks (Oaktree Capital): Oaktree manages over $80 billion and we've covered Marks' insightful commentary numerous times. His presentation highlighted the "human side of investing" and the difference between theory and practice. The manager said he splits investors up into two categories: those who know and those who don't, pointing out that it's what investors *think* they know that gets them into trouble. Risk can be introduced when investors overestimate what they know about the future.

Marks says that the main difference between value and growth investors is that value investors focus on the present. He went onto say that, "(The) most important science for investors is psychology. Investors who have their psyches under control will do best." This of course beckons the age old concept of not letting your emotions get in the way of making rational decisions.

He also went on to focus on the importance and difficulty of being contrarian and that market tops typically occur during a time of rampant bullish euphoria. Marks noted that pro-cyclical behavior is a huge mistake.

Oaktree's funds currently have a lot of cash on hand as opportunities are not abundant; Oaktree seems to be doing more selling than buying these days. He also mentioned he thinks that most institutions over-diversify.

Marks said that the gist of his presentation is featured in his new book that we highlighted yesterday, The Most Important Thing: Uncommon Sense for the Thoughtful Investor.



Steve Romick (First Pacific Advisors): Romick noted that enticing opportunities today are scarce and compared it to trying to ski in the middle of summer. The one pocket of snow he does see potential in is large cap stocks as he believes small caps are overvalued.

Romick presented CVS Caremark (CVS) as a business with good tailwinds and a store footprint that's hard to replace. He says the company is undervalued, trading at a P/E of 12.2x net of the pharmacy benefit management (PBM) hedge. He also points out that management owns a lot of stock and that private label is an opportunity for them to grow as it's only 17% of revenue right now.

Interestingly enough, CVS also seems to be under pressure to split up from its previous merger (combining drugstore chain CVS with pharmacy benefit manager Caremark). Numerous analysts and investors believe the break-up value is much higher than CVS' current share price. Rival Walgreen's (WAG) recently sold-off its PBM segment.

Lastly, Romick also gave another investment idea in Hong Kong traded Goldlion (HK 533). It is an apparel and goods manufacturer in China that caters to the mid-high end consumer, akin to Coach or Polo.



Steve Leonard (Pacifica Capital Management): Pacifica focuses on picking good businesses, but more importantly places emphasis on not making mistakes since they run a highly concentrated book (typically with 10 or fewer holdings). Pacifica originally started out as real estate investors and currently does not see any opportunities in commercial real estate. After shifting their focus to equities, they've beaten the S&P 500 by 9.4% each year since inception.

They primarily invest in domestic companies but like plays with exposure to global growth. They started buying Fairfax Financial (FRFHF) 10 years ago and today it's their largest position. Their second largest holding is Berkshire Hathaway (BRK.A). They haven't really stepped too far out of the box as those are perennial value investing picks.



Whitney Tilson & Glenn Tongue (T2 Partners): Their ideas centered on land companies: one long and one short. They provided an update on St. Joe (JOE ~ their largest short position) and said that the company had incentive not to writedown its developments because around $1 billion of its market cap was attributed to them. As an example, T2 cited how Windmark is worth $12 million, but St. Joe is carrying it at an inflated value 92% higher (T2 said that JOE can do this because of accounting rules). For more on this rationale, head to David Einhorn's short thesis on JOE.

T2's is also long a land-oriented company in the form of General Growth Properties' spin-off, Howard Hughes Corp (HHC). They like HHC because it's undervalued and has a portfolio of high quality assets in desirable locations. The company is difficult to value due to various development properties and other assets, but T2 says that it's obviously worth much more than the $0 carrying value some pieces currently garner (like the air rights over Fashion Mall in Las Vegas). We posted up Tilson's presentation on JOE & HHC here.

Tilson also appeared on CNBC to talk about their stance on JOE and HHC (video embedded below):



On their recent conference call, T2 mentioned they were adding to their HHC position on the recent pullback. Bill Ackman is the Chairman of HHC and his hedge fund Pershing Square owns HHC too. For more from Tilson, head to T2's thoughts on contrarianism.



Rahul Saraogi (Atyant Capital India Fund): Given that Saraogi manages an Indian-focused fund, it should come as no surprise that his presentation focused on this country and the ability to find gems in a "minefield of value traps." Overall, he thinks India has nice tailwinds: depth of markets, domestic demand, and solid demographics. The main question he focused on was what prevents a stock from reaching its intrinsic value?

While there are 6,000 publicly traded companies in India due to the low cost of going public, the trick is identifying the real value. Saraogi thinks the country is a paradise for value investors who are willing to put in the work to separate the gems from the value traps. Liquidity is volatile and there's little analyst coverage outside of the top stocks, so there's some hairy situations investors can dig into. However, he also notes that corporate governance is still a problem there, citing examples of frequent equity dilution.



David Nierenberg (D3 Family Funds): Nierenberg works directly with companies in a constructive manner in order to unlock value. Back in 2008 he learned a valuable lesson that the macro picture matters as cheap got even cheaper. He offered two investment ideas: Multiplus (SAO: MPLU3), a Brazilian loyalty program administrator and MBAC (NEX: MBC), another Brazilian play that focuses on phosphate.



Guy Gottfried (Rational Investment Group): Gottfried, previously of Bruce Berkowitz's Fairholme Capital, turned to Canada for value investing opportunities. The inefficient market there has priced Morguard Corp (TSX: MRC) quite cheap at less than 5x cashflow while the company is very well-run. He argues that you essentially get their owned properties for free.



Ori Eyal (Emerging Value Capital Management): Eyal's presentation focused on a company's management and their (lack of) care about minority shareholders. Eyal's global focus means he has to research not only the company, but the country as well.

He presented two ideas: first, a share-class arbitrage of Grupo Prisa. He says to simply long the B shares (PRIS/b) and short the A shares (PRIS/a) as the risk/reward is skewed favorably with 50% potential upside and limited downside.

His second idea was Israel-traded Willi Foods, the leading kosher food distributor in Israel that is also looking to acquire a distributor in the United States. The company trades for around 5x this year's earnings net of cash (the $50 million cash stockpile represents half the market cap).



Kian Ghazi (Hawkshaw Capital Management): Hawkshaw runs a concentrated long/short fund and focuses on high quality companies. Ghazi presented Ingram Micro (IM) as a one-stop-shop and says that the threat from "the cloud" is overblown and that not all software is shifting there.

The company has 25% market share (leading its competitors) and Ghazi thinks it can still grow 3-4% as the industry has been focusing on ROIC. While Ingram Micro trades at .9 times tangible book value, the primary risk here is a global slowdown in IT spending.


Tomorrow we'll post a summary of day two so be sure to subscribe to our free updates via email or via RSS reader.

Hedge Fund Manager Profiles ~ What We're Reading 5/4/11

A special midweek linkfest focusing on profiles of various investors:

Profile of Bill Ackman [New York Observer]

Also our background info on Ackman's Pershing Square [Market Folly]

Profile of Carl Icahn [NY Times]

Carl Icahn responds [NY Times]

A look at Bridgewater's Ray Dalio [NYMag]

Profile of hedgie Joe Dimenna [Business Insider]

Howard Marks' New Book: The Most Important Thing

Oaktree Capital's Howard Marks just released his new book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor. We wanted to highlight this because Marks' market commentary has been some of the most insightful around.

Often quoted for his wisdom, Marks' new book has received some impeccable recommendations:

Baupost Group's Seth Klarman says, "Regular recipients of Howard Marks's investment memos eagerly await their arrival for the essential truths and unique insights they contain. Now the wisdom and experience of this great investor are available to all. The Most Important Thing, Marks's insightful investment philosophy and time-tested approach, is a must read for every investor."

Berkshire Hathaway's Warren Buffett also offered praise by saying, "When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something, and that goes double for his book."

When two of the greatest investors of all time say something is a must-read, then you quite simply have to read it. We look forward to learning from Marks' book, The Most Important Thing and recommend our readers do the same.

Sardar Biglari Goes Activist on Penn Millers Holding Corp (PMIC)

Sardar Biglari's Lion Fund and Biglari Holdings (BH) recently filed an activist 13D on shares of Penn Millers Holding Corp (PMIC). Due to activity on April 19th, Sardar Biglari revealed a 8.4% ownership stake in the company with 416,598 shares.

While his SEC filing signals activist intent, he did not outline any immediate plans. Sardar Biglari runs publicly traded Biglari Holdings (BH), formerly known as Steak 'n Shake. He has also essentially merged his hedge fund (the Lion Fund) into the company as well.

Berkshire Hathaway-esque Model

Biglari Holdings (BH) initially drew interest from value investors because it seems as though Sardar is trying to mimic Berkshire Hathaway's holding company model. BH has tried repeatedly to buyout insurer Fremont Michigan (FMMH) to acquire an insurance float to invest ala Warren Buffett.

Additionally, Biglari has executed a 1-for-20 reverse split of his BH shares in order to garner a higher stock price. He apparently did this in an effort to ward off short-term holders. He also is implementing a dual share class structure like Berkshire, with new B shares being issued worth one-fifth the value of the A shares and with 1/20th the vote. Shareholders would receive 10 B shares for each share of BH currently owned.

Since Biglari has been unsuccessful in his quest for FMMH, it seems he has focused his attention on Penn Millers (PMIC) now. And while value investors initially liked what Biglari was pursuing, they took issue with his compensation package.

Biglari Holdings (BH) is an investment management and holding company. Its subsidiaries include Biglari Capital, as well as restaurants such as Steak 'n Shake and Western Sizzlin. We've also detailed how Biglari owned some Sonic (SONC) in the past as well.

So while Biglari's pursuit of Fremont Michigan hasn't succeeded, his activist pursuit of Penn Millers could heat up if he truly desires an insurance float.

Per Google Finance, Penn Millers Holding Corp is "a holding company of Penn Millers Insurance Company. It is engaged in providing a variety of property and casualty insurance products designed to meet the insurance needs of certain segments of the agricultural industry and the needs of middle market commercial businesses."

Scout Capital Starts Arcos Dorados Stake (ARCO)

James Cricthon and Adam Weiss' hedge fund Scout Capital has started a position in Arcos Dorados Holdings, Inc (ARCO). Due to a 13G filed with the SEC, Scout has revealed a 5.2% ownership stake in the company with 6,733,263 shares.

The company recently priced its initial public offering (IPO) at $17 per share in the middle of April and it's very likely Scout participated in this. Shares now trade around $22.50.

The name of the company in Spanish literally translates into "gold arches." They purchased McDonalds' (MCD) operations in Latin America back in 2007. Scout's interest in the name shouldn't come as a surprise given that they've also held a very large position in McDonald's (MCD).

Scout manages over $4 billion. Before founding their hedge fund, Crichton worked at Zweig-DiMenna and received his MBA from Harvard while Weiss worked at Dan Loeb's Third Point and received his MBA from Columbia.

We've detailed some other recent portfolio activity from this hedge fund including an increase in their Domino's Pizza position (DPZ).

Per Yahoo Finance, Arcos Dorados "operates and franchises McDonald's restaurants. The company has operations in 19 territories, including Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curacao, Ecuador, and more.".

Ira Sohn Investment Idea Contest

***Update: Be sure to check out our notes from the Ira Sohn Conference for 2011 where we're providing updates on the presentations from top hedge fund managers.


The legendary Ira Sohn Investment Conference in New York has a new twist this year. They are having an investment idea contest before the event to be judged by Seth Klarman, Michael Price, David Einhorn, Bill Ackman, and Joel Greenblatt. The winner gets to present their investment idea at the conference to 2,000 attendees later this month.

The judges are looking for the best investment idea with a one-year timeframe. You can learn more about the contest and submit your ideas here. Deadline for submissions is May 20th.

Here's the details of the conference:

Wednesday, May 25th, 2011
12:15 - 6pm
Rose Theater, 5th Floor, Frederick P. Rose Hall
Broadway at 60th Street, New York City

For more information on the contest and to submit your idea, visit http://www.irasohnconference.com/contest

Market Folly Contest Too

We're having a simultaneous contest for our readers too. Entry is free so simply email your submission to us: marketfolly@gmail.com.

We'll handpick our own winner (totally separate from the Ira Sohn). The winner of our independent contest will receive a free 1-year subscription to our Hedge Fund Wisdom newsletter (a $199 value). The runner-up of our contest will receive a copy of Bethany McLean & Joe Nocera's book, All The Devils Are Here. Good luck and get writing!

Strategist Saut Points to Transports: Latest Market Commentary

Market strategist Jeff Saut's latest weekly commentary reiterates his message that "you can get cautious from time to time, but don't get bearish." He thinks this is a buy-the-dips market and also points to some recent signals.

Focus on Transports

He writes, "The Dow Jones Industrial average recorded yet another 'buy signal' as the Transportation Average surged to new all-time 'highs' confirmed by the industrial's rally to a new reaction high. It was the third Dow Theory 'buy signal' of the past 10 months and reconfirms that the direction of the senior index is up."

Transports are often seen as a gauge of economic activity and we noticed this last week as well, posting on Twitter that "if transports are (a) leading economic indicator, rails pointing to good times UNP NSC KSU." We highlighted that railroad stocks are surging higher and have noted increased hedge fund interest in the past few quarters. Be sure to follow MarketFolly on Twitter as we share daily market thoughts there.

So while the market is holding up nicely and the transports are signaling a continued economic recovery, Saut says to keep a cautious eye out, but don't turn bearish: "we expect on/off strength into June followed by the first potential downside vulnerability as participants worry about the end of Quantitative Easing."

After all, many investors have focused on not "fighting the Fed" and prominent hedge fund manager David Tepper famously said to buy stocks back in September simply because the Fed was printing money. The end of that printing press, though, could certainly alter the portfolio construction of many managers.

Embedded below is Saut's latest investment strategy:



You can download a .pdf copy here.

Be sure to check out Saut's commentary last time around where he said to accumulate stocks with favorable risk/reward.

Maverick Capital Focusing on China & Emerging Markets (Investor Letter)

Lee Ainslie's hedge fund firm Maverick Capital finished the first quarter up 3.6% and has seen 14% annualized returns since 1995. Many of their recent gains are attributable to their short positions in emerging markets. As we've detailed before, some hedge funds believe inflation is the biggest threat to the emerging world.

The hedge fund is now paying more attention to global macro issues as they affect markets more than ever. Maverick is not the first equity-centric hedge fund to include macro observations in their research as David Einhorn's Greenlight Capital has done this for a few years as well.

China's Importance

In Maverick's first quarter letter, Steve Galbraith talks about the importance of emerging markets. He writes, "From a top down perspective, what we see in China is a wonderful investment cocktail characterized first and foremost by tremendous growth potential, likely laced with enormous winners and losers but with still meaningful reliance on the state for capital allocation."

Interestingly, Maverick had $2 billion in gross capital (both long and short) exposed to China. They are long consumer and technology companies, financial firms with double digit return on equity, Chinese social media companies, as well as industrial companies with wide moats. On the short side, they are focusing on bad balance sheets and bad governance. In the past we've highlighted some of the Chinese reverse merger frauds as well.

Maverick believes the biggest risk in China is the misallocation of capital. Galbraith writes that, "Ironically, I suspect the true test of the Chinese economic model will come not with hardship, but with prosperity." Many investors are watching cautiously to see how the Eastern nation handles such growth.

Embedded below is Maverick Capital's first quarter letter (email readers need to come to the site to read it):



In recent portfolio activity from this hedge fund, we detailed how they reduced their position in Rightmove recently (LON: RMV). For more commentary from Ainslie, be sure to read his 2010 year-end letter focusing on the impact of fund size on returns.

David Einhorn Covers Some Shorts, Buys Yahoo & Best Buy

David Einhorn's hedge fund Greenlight Capital struggled last quarter, returning -2.5%. Their short positions caused a drag on performance and as a result they've covered some of their lower conviction names.

This isn't the first time we've seen a hedge fund do this in recent memory as Whitney Tilson's T2 Partners recently covered shorts that were noticeably affecting performance. In this market, the cost of hedging is high.

Greenlight writes, "We are in a particularly difficult environment for shorting stocks. In response, we have reviewed many of the names in our short portfolio. We covered more than a dozen lower confidence shorts during the quarter. We exited four successful shorts in the for-profit education industry, two foreign bank shorts (one at a small gain, the other at a large loss), a domestic bank short (at a loss), and a technology short (also at a loss). We also covered several others where performance exceeded our expectations. We kept our highest conviction older ideas (including MCO and St. Joe) and our highest conviction newer ideas (including the energy-technology stocks described above)."

New Positions

The second most noticeable development in Greenlight's portfolio is their addition of three new positions.

Best Buy (BBY): Einhorn's hedge fund sees opportunity in the company's Mobile concept, international stores and higher-margin services. Greenlight built their position at $33.33 and shares now trade around $31.40, so this is yet another rare chance to enter a stock around the same price a major hedge fund paid.

Yahoo (YHOO): Many investors have pitched Yahoo as a value play in recent memory and Greenlight obviously sees value here as well, establishing a position at $16.93 per share (the stock trades around $17.80 now). Greenlight likes the company's net cash position and point to Yahoo's 40% stake in Alibaba Group as a valuable asset.

Delphi Automotive: They also acquired a stake in the not-yet-publicly-traded automotive supplier Dephi. This is a hedge fund favorite that has gone through the bankruptcy process and recently morphed into a one-class ownership structure. There's speculation that the company will potentially go public.

We've also detailed some of Greenlight's other positions they added earlier this year.

Top Positions

Rounding out the quarter, Greenlight Capital's largest positions in alphabetical order were:

- Arkema (France: AKE or ARKAY on pink sheets)
- Delta Lloyd
- gold
- Pfizer (PFE)
- Vodafone (VOD)

The most noticeable quarter-over-quarter change here is that Ensco is no longer one of their top holdings. We'll have to wait for their 13F disclosure to see if they merely reduced the position, sold completely out of it, or if other names appreciated more in their portfolio.

Embedded below is Greenlight's first quarter letter in its entirety (email readers come to the site to read it:



To learn to invest like this manager, be sure to check out Einhorn's recommended reading list.

Strategist Saut: Accumulate Stocks With Favorable Risk/Reward

Raymond James market strategist Jeff Saut is out with his latest weekly missive and it's quite clear he's bullish in the intermediate term. However, he does think a consolidation could still happen in the near-term.

In particular, Saut points to oil:

"Indeed, over the past few weeks oil has become almost as extended above its 200 day moving average as it was in July 2008, and we all know how that ended. Not that I am predicting a similar collapse in the price of Texas Tea, but rather that a consolidation/pullback period is likely, which could provide the backdrop for another 'leg up' in stocks (even the energy stocks)."

Overall, Saut thinks any pullback in the S&P 500 will be around the 1315-1320 area. Saut was buying stocks during the February/March decline and it seems he has a 'buy the dips' mentality.

So what stocks does he like? Saut prefers favorable risk/reward setups and offers up Hospira (HSP) as a name with a lowered risk profile. He also continues to like Williams Companies (WMB). We just noted that Dan Loeb's hedge fund Third Point LLC likes WMB as well. You can read an in-depth analysis of Williams Companies in the most recent issue of our newsletter.

In other energy names, the market strategist also likes EV Energy Partners (EVEP), LINN Energy (LINE), and Clayton Williams Energy (CWEI).

Embedded below is Jeff Saut's latest market commentary:

Jeff-Saut-Market-Commentary


You can download a .pdf copy here.

For more insight from market strategists, head to our recent coverage of Don Coxe, who says the risk of a stagflationary bond bear has arrived.

Notes From Warren Buffett's Meeting With MBA Students

Today we're pleased to present a guest post courtesy of Professor David Kass of the Robert H. Smith School of Business at the University of Maryland. He runs a blog and recently posted up notes from his meeting with Warren Buffett:

"Do you believe that Africa will be the major driver of world growth in the years ahead?

WB: China will be a bigger driver of growth in the next 10-20 years. They are growing from a smaller base than that of the U.S. The U.S. and the rest of the world will be growing rapidly as well. The U.S. can’t grow as fast as China on a per capita basis. People are becoming more productive, so output per capita will increase. The question is how will this output get distributed.


In the past you have said your investment philosophy was 85% Graham and 15% Fisher. Has that changed?

WB: Started out looking for cigar butts with one puff left. There were lots available in the 1950’s. That approach does not work well with large amounts of money to invest. His philosophy has shifted slightly more toward Fisher. Berkshire currently has $150 billion in cash and investments. He met Charlie Munger in 1959 who argued for investing in wonderful businesses and sit with them as they get better over time. In 1951 WB picked up the Moody’s Manual for that year and found Western Insurance selling at ½ times earnings. A few years ago someone sent him a book entitled “Korean Stock Market”. He found 15 – 20 stocks selling for 2X earnings. It was like the old days. He has also made mistakes such as his 1968 purchase of Blue Chip Trading Stamps whose sales have dropped from $120 million at its peak to $18,000. Dexter Shoe was another bad business that he bought. You need to get on an 80 mph train that is speeding up.


Question about WB’s ability to evaluate management in place of companies he acquires.

WB: In terms of evaluating management, it is very hard to do for public companies. You can look at the record (like baseball). When we buy a business it is for keeps. When someone comes to me and wants to sell a business and I hand him $1 billion, I have to decide if he’s going to have the same energy when he’s working for us as he had when building the business. We do not have any contracts with our managers. In the Fall of 2006 I received a 1 ½ page letter from a guy in Israel. I had not heard of the guy or his company before. He offered to come meet with me. After we met, I handed him $4 billion (Iscar) and was counting on him to run the business the same as before we gave him the money. Want managers to be passionate about their business. You cannot put passion into someone. It’s worked out most of the time. Every now and then we make a mistake. We want people who are in love with their business, not the money. (People who would say: “I’d rather go to work than anything else in the world”.) Our batting average is good and has probably gotten better over time. We are looking for the guy who is still in love with his business and for one reason or another, needs to monetize it. With respect to stocks, we are not interested in meeting with management. We do not want to see their projections. We look into their products and “moats” around the business.


When you have made a mistake, what steps did you take to determine what went wrong?

WB: His circle of competence is growing over time. When investing in stocks, there are no called strikes. He waits for the pitch he wants. The mistakes he has made resulted from thinking he understood a business when he did not. He prefers to learn from other people’s mistakes (not from his own). On Dexter Shoe, he issued shares in Berkshire that are today worth $3 billion. Dexter Shoe went to zero. He is wrong from time to time, but overall has a good batting average. One should focus on the future. Don’t dwell on mistakes. Do not make a mistake with respect to the person you marry."

To read the rest of the notes from Buffett's meeting, head to Professor Kass' blog.

And for all things Warren Buffett, head to some of the resources we've posted up, including:

- Warren Buffett's recommended reading list
- Top 25 Buffett quotes
- Why Berkshire Hathaway bought Lubrizol: pricing power

Andreas Halvorsen's Viking Global Adds to Universal Health Services (UHS)

Andreas Halvorsen's Viking Global recently filed a 13G with the SEC regarding shares of Universal Health Services (UHS). Due to portfolio activity on March 30th, Viking Global has disclosed a 5.9% ownership stake in UHS with 5,343,992 shares.

This marks a 71% increase in their position size as the hedge fund firm owned 3,110,994 shares of Universal Health at the end of 2010. In other portfolio activity, we've also recently highlighted that Viking increased its H&R Block (HRB) stake as well.

Per Google Finance, Universal Health Services "owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers."

Michael Burry's Subprime Speech at Vanderbilt: Inside the Doomsday Machine

We wanted to post up a recent speech by subprime short-selling legend Michael Burry. His now defunct Scion Capital saw outsized returns as the value investor turned subprime expert saw the housing crisis coming and profited handsomely. His story is chronicled in Michael Lewis' bestselling book, The Big Short.

His speech is entitled, "Missteps to Mayhem: Inside the Doomsday Machine with the Outsider who Predicted and Profited from America's Financial Armageddon."

While the investor walks us through his past line of thinking, he is curiously hesitant to answer questions about his current investment portfolio. In late 2010, we learned that Burry bought farmland and gold.

Embedded below is Michael Burry's speech (email readers come to the site to view it):




For more on Burry's amazing trade, definitely read Michael Lewis' chronicle in The Big Short. Additionally, we'd recommend reading Burry's primer on credit default swaps & the subprime mortgage short which he originally penned back in 2006.

Third Point Focused on Spin-Outs & Closes to New Investors

Dan Loeb's hedge fund Third Point returned 8.6% in the first quarter of 2011 and manages $6.7 billion. Most recently, we noted Third Point's reduced net long exposure. Last time around, Loeb mentioned he would no longer be penning the letter to investors, but we still get some color on their portfolio construction and where they're finding value.

In particular, Third Point is focused on spin-outs as the Q1 letter details:

"At our annual Investor Day in January, we told you that we were enthusiastic about equities in a market poised for a wave of corporate transactional activity on a scale not seen since 2007. A combination of factors including record high levels of cash on corporate balance sheets, highly incentivized LBO firms, the return of cheap debt financing, and anemic top line growth is conspiring to make this an ideal period for the kind of special situation equity opportunities that are a core part of our strategy."

Loeb's hedge fund has focused specifically on the energy sector, owning positions in Williams Companies (WMB), El Paso (EP), and CVR Energy (CVI). We highlighted that Third Point started a position in El Paso in February.

Regarding Williams Companies (WMB), Third Point originally invested in November and has since added to the position as the company announced plans to split itself via an IPO of its E&P business in the second half of the year and a full spin of the remaining business in early 2012.

This is the type of event-driven investing Third Point loves. Besides Third Point, numerous other prominent hedge funds own a position in Williams Companies. You can read an in-depth analysis of WMB by subscribing to our Hedge Fund Wisdom newsletter as we featured the stock in our most recent issue.

Also of note is the fact that Third Point will close to new investors effective June 1st. They believe this is a prudent time and this is not the first time they've done so.

Embedded below is Third Point's first quarter letter to investors (email readers come to the site to read it):



To learn how to invest like Dan Loeb, check out his recommended reading list.

What We're Reading ~ 4/15/11

A recent John Paulson interview [Zero Hedge]

Latest investor letter from macro fund QB Partners [The Big Picture]

How to protect yourself from rising interest rates [Reuters]

See also the best investments during inflation [Market Folly]

The market leaders keep falling [Reformed Broker]

The easiest way to succeed as an entrepreneur [James Altucher]

Five things financial advisors are doing to make more money [New Rules of Investing]

Chartin consumer confidence: where do we go from here? [Research Puzzle]

How safe is your Roth IRA? [The Atlantic]

On the QE2 trade & more [Pragmatic Capitalism]

Apple doesn't have iPad strategy, has post-PC strategy [Forbes]

Google (GOOG) hurt by trying to stay competitive [WSJ]

Joel Greenblatt's New Book: The Big Secret for the Small Investor

Just wanted to give everyone a head's up that value investor and hedge fund manager Joel Greenblatt's new book just came out yesterday. It's called The Big Secret for the Small Investor: A New Route to Long-Term Investment Success.

The book details a new approach to investing based on value investing, common sense, and quantitative discipline. Basically, it intertwines his value investing style with an indexing approach. Greenblatt is the founder of Gotham Capital and has seen 40% annualized returns from 1985-2005. He is also an adjunct professor at Columbia Business School.

Greenblatt has authored numerous other books and they each cater to specific investors, including:

You Can Be a Stock Market Genius - Though the title is somewhat cheesy, this book has been recommended by hedge fund legends like Seth Klarman and David Einhorn. It is the definitive text on spin-offs, restructurings, and special situation investing.

The Little Book That Still Beats the Market - Teaches readers how to find good businesses when they're trading at bargain prices.

Greenblatt's newest book, The Big Secret for the Small Investor, is seemingly aimed at the broadest audience since it looks to be a quick read (150 pages) and details value-weighted indexing as an applicable investment style.

Don Coxe: Risk of Stagflationary Bond Bear Has Arrived (Latest Investment Recommendations)

It's been a longtime since we checked in on market strategist Don Coxe. He publishes the 'Basic Points' each month and his latest rendition is entitled "Slouching Towards Stagflation?"

At the end of his commentary, Coxe lays out his latest investment recommendations, including a market weight position in Japan. Just this morning we touched on how investment manager Ruffer is seemingly overweight Japan.

Here are Coxe's latest recommendations:

1. His main advice ties into the title of his commentary regarding stagflation. Coxe writes, "Just because Stagflation of Seventies proportions is only a remote possibility doesn't mean that meaningful stagflation-style damage won't be inflicted on bond portfolios - particularly those denominated in currencies of grossly overindebted countries. We think the risk of a real stagflationary bond bear has now arrived, and have therefore reduced recommended bond durations. Unless the stagflation risks recedes, we shall be reducing those durations further in coming months. So should you."

This is a big talking point because Warren Buffett himself has reduced the duration of Berkshire Hathaway's bond portfolio as well. There is a slight difference in the reasoning, though, as Buffett was concerned about inflation whereas Coxe is concerned about stagflation.

2. Cease underweighting Japan and move to market weight (with special attention to buying global brands).

3. Underweight European financials and euro-denominated debt. Emphasize exposure to Swiss francs and Canadian dollars.

4. Overweight precious metals in commodity-focused portfolios and include exposure in balanced portfolios.

5. "Agricultural stocks remain the commodities group with the best balance of risk and reward among all the possible outcomes of the current crises in the Mediterranean region and the Arabian peninsula."

6. Overweight the oil sands companies and emphasize coal and oil names in North American energy portfolios. Fellow market strategist Jeff Saut of Raymond James was also out singing the praises of the oil sands this week. Industrial clients, Coxe says, should hedge against remote risk of catastrophe in the Middle East by purchasing far out of the money calls on crude oil.

7. Overweight offshore oil companies that "do not face continued litigation risk from Macondo." This means avoid the likes of BP (BP), Transocean (RIG), Anadarko Petroleum (APC), Halliburton (HAL), etc.

8. Continue to avoid uranium stocks (Cameco (CCJ) is a major player there).

9. Pay heed to food and fuel inflation, which are working together to dent consumers' discretionary incomes.

10. Underweight base metal stocks despite their near-term benefit of rebuilding in Japan.


For more insight from strategists, check out their market commentary we've posted up recently.

Tremblant Capital Reduces Rightmove Position

This is the second major hedge fund to reduce a position in UK-traded Rightmove (LON: RMV) in the past month. Brett Barakett's Tremblant Capital Group have reduced its previous 3.97% ownership stake in RMV below the 3% disclosure threshold.

Tremblant actually owned as much as 14.22% of the company back in September 2008 but has steadily reduced its position size since that peak. Before founding Tremblant, Barakett was a portfolio manager for Louis Bacon's global macro hedge fund Moore Capital. Also, Brett's brother, Timothy, used to run fellow hedge fund Atticus Capital.

Just last month, we highlighted that Lee Ainslie's hedge fund Maverick Capital had reduced its position in Rightmove below the 3% ownership stake as well.

Both hedge funds could either retain a small position in the name (<3% of shares each) or they could have sold out of the name completely; it's impossible to discern. We won't know anything further regarding these positions unless they breach the 3% threshold again.

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."

Scroll through all our coverage of hedge fund activity in UK companies here.

Ruffer Investment Company Overweight Japan: Market Commentary

Continuing our expanding coverage of hedge fund managers, today we focus on Jonathan Ruffer and Ruffer Investment Company. Ruffer is headed to be on par with other talented UK managers that we've covered like Odey Asset Management and Lansdowne Partners. Ruffer has returned approximately 16% per year since inception in 2004.

Jonathan Ruffer starts his most recent commentary by pointing out that the financial press has become more interested in his firm's views as his firm has grown. Though not part of the press, Market Folly is jumping on the bandwagon as his commentary is intriguing and pertinent.

Main Takeaways

Ruffer has almost one-third of their equity exposure in Japan. Clearly, they favor the country and see it as a compelling opportunity. Ruffer writes, "while in the short term the direction of the markets is anybody's guess (and may well be frighteningly volatile), this is a turning point which will introduce the structural changes in Japan and, in turn will lead to a sustained bull market for lasting years. There is, frankly, no other market for which this is a remotely possible outcome."

The investment firm expects the Bank of Japan to pump liquidity into the system. They note that this will be bad for the yen (but good for the country overall). In past months, we've pointed out how some hedge funds have shorted the yen.

Some of Ruffer's investments in this arena have included Prospect Japan Fund (PJF) and Japan Residential Investment (JRIC). Ruffer actually owned some of these names in 2010 before the crisis even hit. He is unwavering in his conviction, it seems.

Embedded below is the latest market commentary and investment review from Jonathan Ruffer:



You can download a .pdf copy here.

For more coverage of UK-based managers, we've posted Odey's thoughts on agriculture & commodities, as well as Lansdowne's portfolio activity.

East Coast Asset Management on Competitive Advantage: Quarterly Letter

East Coast Asset Management's quarterly letters have become one of our favorites for insight and timeless advice on the topic of compounding as well as variant perception. This time around, Christopher Begg focuses on competitive advantage and the ability of businesses to first become 'local champions'.

Begg writes that, "high quality businesses that can raise prices and whose products have localized advantages with a growing emerging market consumer will thrive." This point is exemplified by Warren Buffett & Berkshire Hathaway, whose latest purchase of Lubrizol was seemingly based on pricing power.

The main gist of the letter is that solid investments are found in businesses with solid competitive advantages that allow them to do something their competitors cannot.

East Coast's letter also goes on to quote Steve Mandel of Lone Pine Capital who said, "Our ability to identify businesses that have the market opportunity, product distinction, competitive advantage and management skill to grow earnings and cash flow for longer than is factored into consensus expectations has distinguished our investment effort over the years."

Lastly, Begg gives an example of misclassifying an investment in Cisco Systems (CSCO) and how he has learned from the mistake. Investors never stop learning and this is the perfect example of why many successful investors critically focus on competitive advantage.

Embedded below is East Coast Asset Management's latest letter:



You can download a .pdf copy here.

Begg has also accepted a position as an Adjunct Professor at Columbia Business School and will be teaching Security Analysis this summer. For more great insight from this firm, check out East Coast on gaining an investment edge.

What We're Reading ~ 4/8/11

Thoughts on Ackman's latest activist holding: ALEX [Value Plays]

Notes from the Harvard Business School turnaround conference [DDI]

Jeff Gundlach breaks down a multi-asset portfolio [Prag Cap]

Margin in Trading [Stone Street Advisors]

Carl Icahn calls Blockbuster the worst investment ever made [Fast Company]

Bill Ackman's letter to Howard Hughes (HHC) shareholders [ValuePlays]

Google (GOOG): The freight train that is Android [Above the Crowd]

Mutual funds employing hedge-fund like strategies [USAToday]

Top 10 dying industries [WSJ]

Career tips from Goldman Sachs [Business Insider]

Oaktree Capital's Howard Marks Speaking at the Value Investing Congress

Readers of the site should be familiar with Oaktree Capital's Howard Marks as we've posted his commentary numerous times and found it very insightful. Now you can hear his latest thoughts on the markets and his favorite investment ideas as he will be speaking on May 3rd & 4th in Pasadena, California. Learn more about the Value Investing Congress.

Marks is a contrarian and founded Oaktree in 1995 and now manages over $80 billion. He has a new book coming out entitled The Most Important Thing: Uncommon Sense for the Thoughtful Investor and everyone attending the event will receive a free copy.

Additionally, Guy Gottfriend will be presenting. He is the founder of Rational Investment Group and has generated net returns of 40% per annum since launching in 2009 while holding 25% of assets in cash.

Here's the full list of speakers at the event:

- Howard Marks, Oaktree Capital
- Jeffrey Ubben, ValueAct Capital
- Steven Romick, First Pacific Advisors
- David Nierenberg, The D3 Family Funds
- Rahul Saraogi, Atyant Capital (India)
- Michael Kao, Akanthos Capital Management
- Ori Eyal, Emerging Value Capital Management
- Kian Ghazi, Hawkshaw Capital Management
- Guy Gottfried, Relational Investment Group
- Whitney Tilson & Glenn Tongue, T2 Partners

Here's a rare chance to get the latest market thoughts and investment ideas from hedge fund managers. It's also a great chance to network and talk stocks with other analysts and portfolio managers attending the event. Click here to register for the Value Investing Congress.

Michael Steinhardt on Differences Between Past & Current Hedge Funds

Michael Steinhardt founded Steinhardt Partners in 1967 and generated 24% average annual returns over a 28 year period. He was one of the true pioneers in the industry and he recently sat down with CNBC for an interview.

The former titan talked about his time as a hedge fund manager, saying "When I was doing it, it was an elite phenomenon. Now it ain't an elite business anymore." Steinhardt is now the chairman of ETF firm, WisdomTree.

Hedge Fund Differences: Then & Now

Performance: He notes that the main difference between hedge funds then and now is the goal of performance. He targeted (and achieved) outsized returns, while many funds today are happy cranking out "only" 12-14% gains.

Assets Under Management (AUM): Steinhardt also slipped in his signature phrase of 'diseconomies of scale,' referring to the fact that as assets under management (AUM) grew, true outperformance was harder to achieve. He chastised modern hedge funds as asset gathering behemoths with goals of making money from the assets (management fee) rather than making money from performance.

Impact of Fund Size on Returns: This is a big talking point amongst investors, especially as of late it seems. The classic example, of course, is John Paulson. His hedge fund Paulson & Co catapulted to fame with his stellar returns shorting subprime. As his AUM has swelled, investors have raised concern and Paulson addressed his fund size in his year-end letter.

Maverick Capital's hedge fund founder Lee Ainslie also wrote a quarterly letter to refute the notion that large fund size negatively impacts a manager's ability to generate returns.

Steinhardt's point (and it's a good one), is that regardless of whether or not these funds generate performance, the funds are still making money due to the management fee on a sizable chunk of assets.

Hedge Fund Herding: The hedge fund legend also points out that so many managers are using similar strategies these days, whereas he was one of the few employing them in his time. This is yet another topic that high profile funds have been forced to address via investor letters. Viking Global's Andreas Halvorsen wrote about hedge fund herding here (scroll down in the post).

In short, Steinhardt raises some valid points about how hedge funds have slightly strayed from their original incarnation. The reason? Money, of course.

He's not alone in his concern, either. After all, so many prominent funds wouldn't have to address such issues had they not seen continuous signs of concern from their investors.

You can watch Steinhardt's interview below where he also gives his macro outlook and oddly enough goes on a tirade against Warren Buffett (email readers come to the site to watch):



In the video, Steinhardt also briefly mentions that he remains short 2 year Treasuries. You can also read his past thoughts on why he thinks treasuries are foolish.

T2 Partners Attributes Poor Performance to Contrarianism

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners sent out a monthly update to investors and they reveal performance of -4.3% in March and -3.1% for the year. This trails the S&P 500, which is up 5.9% in 2011. More interesting than the performance figures, though, is the the notion of deviating from the herd and its subsequent effect on that performance.

T2 writes that, "a bigger reason for our underperformance, especially last month, is our investment strategy, which is rooted in deviating from the crowd with contrarian bets. It's the only way to outperform the market over the long term, but it also carries with it the risk - indeed, the certainty - that there will be periods during which one underperforms the market."

Obsession With Short-Term Performance

This is worth pointing out because Wall Street and investors are seemingly always fixated on short-term performance. In part, this is one of the reasons that Shumway Capital Partners returned outside investor capital (among many other reasons). In his letter, Chris Shumway noted that returning outsider money would allow him to focus on long-term positioning that he has been so successful with.

When investors place monthly expectations on a manager, rather than yearly ones, the manager is pressured to attain short-term performance and it compromises their core investment strategy.

Value Versus Global Macro Managers

To illustrate this point, we turn to a comparison between value-based investors and global macro traders. If a macro manager sees a mountain top (gains from a potential trade), he will go after it. However, if he encounters a valley (temporary loss of capital) on the way to the mountain top, he will pivot and trade around that position to eliminate near-term risk or even profit from the decline by temporarily shorting.

A value-based manager, on the other hand, will continue to hold their long position and ride out the valley (decline) in order to get to the mountain top (gain). Their deeply rooted stance makes them more prone to near-term underperformance.

T2's Letter

In the recent past, T2 Partners has blamed poor performance on their short positions. Yet despite covering their short of Netflix (NFLX), they puzzlingly held onto other valuation shorts like Opentable (OPEN) and Lululemon (LULU), but that's a whole 'nother conversation.

Now they are attributing poor performance to contrarianism. Some will undoubtedly say this is just excuse after excuse and wonder what the fund will blame next. Putting that aside, T2 does underline a prescient point worth extracting: sometimes it's painful to be contrarian.

In the letter, T2 goes on to highlight that, "it's easy to deviate from the crowd, of course, but it's much harder to be right - and even harder to be right on the timing."

If a value investor can stomach the near-term anguish (and assuming their thesis is proven correct), they'll make it to that mountain top eventually. T2 gives an example of this with their investment in Iridium (IRDM). While they think the stock is a triple in 3-5 years, they have to hang on through the bumpy ride in the near-term as last month the stock was down 15.1% and the warrants dropped 24.1%.

T2's run of poor performance continues and you can read their take on the situation embedded below in their investor letter (email readers need to come to the site to view it):



For more on that particular stock, head to T2's analysis of Iridium.

Hedge Fund Third Point Reduces Net Long Exposure: Latest Positioning

Dan Loeb's hedge fund firm Third Point LLC has released its March performance and exposure report. Third Point returned 0.9% in March and is up 8.6% year to date versus 5.9% for the S&P 500. Third Point's Offshore Fund now has an annualized return of 19%.

Latest Exposure Levels

Third Point is net long equities to the tune of 42.2%. This is a decrease of 14%, down from last month's 56.2% net long exposure. As various crises (risk) around the world escalated, Third Point has ratcheted their exposure down. In Loeb's year-end letter, he voiced that he was concerned about the consensus bullish view.

Third Point's largest net exposure is in energy, basic materials, and consumer. In credit, Third Point is 17.1% net long asset backed securities (RMBS & CMBS exposure), 11.5% net long distressed, 6.1% net long performing and -5.1% short government securities. Their credit allocations are largely unchanged from last month.

Third Point's Top Positions:

1. Gold
2. Delphi Corp
3. Chrysler
4. El Paso Corp (EP)
5. NXP Semiconductor (NXPI) ~ multiple securities held

In February, we highlighted how Loeb started El Paso as a new position and it remains one of their top holdings. This month, their exposure to NXP Semiconductor (NXPI) replaces LyondellBasell (LYB) as their fifth largest position.

NXPI is a prime player in the NFC (near field communications) space that seems to be sweeping the mobile industry as interest in mobile payments heats up. The company recently priced a secondary offering at $30 per share and has been doing a roadshow to drum up investor interest. This offering significantly helps liquidity in the stock and should allow larger hedge funds to accumulate positions.

Top Winners & Losers for Third Point

We get a glimpse at some of Third Point's other positions with their top winners from the month, including: CVR Energy (CVI), Short A, Statoil Fuel & Retail ASA (SFR), Aveta, and Health Net (HNET). Their top losing positions for the month include Potash (POT), PHH Corp (multiple securities held), Inmarsat, ProSieben (multiple securities held), and El Paso.

To see analysis of Loeb's portfolio and the investment thesis behind some of his picks, check out our Hedge Fund Wisdom newsletter.

Bill Ackman Starts Activist Position in Alexander & Baldwin (ALEX)

Bill Ackman's hedge fund firm Pershing Square has initiated a new activist position in Alexander & Baldwin (ALEX). Per a 13D filed with the SEC, Pershing has disclosed a 8.6% ownership stake in ALEX with 3,561,943 shares due to portfolio activity on March 21st. This comes after Ackman's other activist position in J.C. Penney (JCP) as well as his stake in Fortune Brands (FO).

Not a New Position?

While this appears to be a brand new position, Pershing also filed an amended 13F for the fourth quarter of 2010. And guess what all of a sudden appears? Shares of ALEX. At 2010 year-end, Ackman's hedge fund actually owned 172,001 shares. This position was previously unreported on their last 13F filing because they filed with the disclaimer of "confidential information has been omitted from this report and filed separately with the Commission."

Ackman obviously did this in order to stealthily accumulate his position. Because let's face it, had he been forced to disclose the tiny new position back in February, the imitators who mimic his every move would have seen this new position and driven prices. Pershing accumulated most of their stake in March. To see the rest of Pershing's investments, head to our Hedge Fund Wisdom newsletter.

Working With Marcato Capital Again

Also worth highlighting in Pershing's new activist stake is the fact that they will be working with fellow hedge fund Marcato Capital again. Marcato was founded by ex-Pershing analyst Mick McGuire and he had previously recommended shares of Landry's Restaurants to Pershing and the two worked together on the activist position.

They've teamed up again on shares of Alexander & Baldwin and Marcato owns 1.3% of ALEX with 551,881 shares. Collectively, the two hedge fund firms together now own 9.9% of the company. Their average purchase price seems to be around $41.xx per share given they spent $168.8 million on the stake.

Additionally, the hedge fund firms have exposure to 372,900 shares via total return swaps. These have a price of $45.12 per share and their ownership stake inclusive of these jumps to around 11% of the company. Overall, the SEC filings contain the standard activist boilerplate regarding talking to management about enhancing shareholder value. We'll have to see what tricks Ackman and McGuire have up their collective activist sleeves.

Per Google Finance, Alexander & Baldwin is "engaged in property development and agribusiness operations. The Company’s wholly owned subsidiary Matson Navigation Company, Inc., together with its two subsidiaries, is engaged in ocean transportation operations, related shoreside operations in Hawaii, and intermodal, truck brokerage and logistics services. The Company operates in five segments in three industries: Transportation, Real Estate and Agribusiness."

To learn more about this hedge fund, check out our profile of Pershing Square.

Eton Park Reduces Airgas (ARG) Position

Eric Mindich's hedge fund firm Eton Park Capital has reduced its stake in Airgas (ARG). Due to an amended 13D filing with the SEC, Eton Park now shows a 4.92% ownership stake in ARG with 4,145,191 shares due to portfolio activity on March 29th.

This is a 31% reduction in their position size. Back in December 2010, Eton Park owned 7.15% of Airgas. The bulk of their recent sales came on February 16th and March 30th at weighted average prices of $63.0019 and $66.3244, respectively.

You'll recall that Airgas had in the past been subject to a takeover bid by Air Products (APD). Eton Park had supported the bid after APD raised its offer numerous times. However, Airgas did not seem receptive. For now, Eton Park still holds a position, albeit a smaller one than previous months.

Per Google Finance, Airgas is "a distributor of industrial, medical and specialty gases (delivered in packaged or cylinder form), and hardgoods, such as welding equipment and supplies."

Viking Global Increases H&R Block (HRB) Stake

Andreas Halvorsen's hedge fund Viking Global has boosted its stake in H&R Block (HRB). Per a 13G filed with the SEC, Viking has disclosed a 5.5% ownership stake in HRB with 16,664,422 shares. This is a 60% increase in their position size as they owned 10,408,200 shares at the end of 2010.

The firm has been taking more concentrated positions as each portfolio manager essentially owns each other's "best ideas". Before founding Viking, Halvorsen worked at Julian Robertson's Tiger Management. You can see the rest of Viking Global's portfolio here.

Per Google Finance, H&R Block is "has subsidiaries that provide tax, banking, and business and consulting services. The Company’s Tax Services segment provides income tax return preparation, electronic filing and other services and products related to income tax return preparation to the general public primarily in the United States, and also in Canada and Australia."