Ira Sohn Conference Notes Part 2: Ackman, Einhorn, Eisman, Icahn, Greenblatt

This is part 2 of our ongoing coverage of presentations given by top hedge fund managers at the Ira Sohn Conference today. Be sure to check out part 1 of our notes from Ira Sohn which includes presentations from Dinakar Singh, Jim Chanos, Phil Falcone and more.

Part 2:


Steve Eisman / FrontPoint Partners: Eisman was profiled in Michael Lewis' great book, The Big Short as one of the big winners in the subprime trade. Last year at Ira Sohn, he said to short for-profit education stocks and that trade paid off as many stocks were down anywhere from 25% to 72% over the past year.

This time around, Eisman focused on US financials, asking "are financials dead forever?" He notes that credit quality is improved but interest margins will most likely continue to contract.

Eisman likes property and casualty insurers, citing the potential for commercial policy pricing to improve. He noted that his year has been particularly hard hit with natural disasters, leading to large insurance losses. He thinks P&C insurers are a 'buy' even if there's another big disaster.

He says the least risky way to play this is via insurance brokers like Marsh & McLennan (MMC), Willis Group (WSH), and Aon (AON). You can read an in-depth analysis of AON in the free sample of our Hedge Fund Wisdom newsletter (direct .pdf download link).

For riskier plays, Eisman points to pure reinsurers based in Bermuda and pulled up a list of them, the most well-known of which is probably Ace (ACE).


Bill Ackman / Pershing Square Capital: Ackman said to buy Family Dollar (FDO). He likes the dollar-store chain because it is like Walmart, but there's room to grow. He also notes the company's solid return on capital as they can build plenty of new stores. Many of Ackman's plays are retail or real estate focused and this one is no different.

FDO actually received a bid to go private from Nelson Peltz's Trian Fund, who offered between $55 to $60 per share in February. They are one of the largest shareholders, owning almost 8% of FDO's shares. Ackman believes that FDO is an attractive target for a leveraged buyout.

Ackman notes that Family Dollar has fallen behind competitor Dollar General (DG) ever since KKR bought DG and now FDO has to improve. The Pershing Square manager thinks shares will trade as much as 70% higher (FDO currently trades around $55 and Ackman thinks it's worth up to $92 including dividends). He also mentioned that his hedge fund was even buying shares today.

We also covered that Ackman started an activist position in Alexander & Baldwin (ALEX).


Joel Greenblatt / Gotham Capital: The value investor talked about the advantage of having a long-term investment horizon. He emphasizes investments that fall under the 'time arbitrage' classification. Market Folly readers will recall that Blue Ridge Capital's founder and hedge fund manager John Griffin also uses this approach. He classifies investments as either time arbitrage or catalyst driven.

Greenblatt's picks included a myriad of names, including: WellPoint (WLP), GameStop (GME), Intel (INTC), Walgreens (WAG), Nordstrom (JWN), Bed Bath & Beyond (BBBY), and Humana (HUM).

He also has a new book out entitled, The Big Secret for the Small Investor: A New Route to Long-Term Investment Success. You can also check out his recommended reading list here.


David Einhorn / Greenlight Capital: Einhorn's presentation laid out the bull case for life insurer Delta Lloyd (AMS: DL), traded in the Netherlands. This is one of his hedge fund's largest positions.

His second pick was Microsoft (MSFT). The tech giant has attracted lots of value investors as of late and you can view fellow hedge fund T2 Partners' presentation on MSFT here. Einhorn says the company still has a shot at the smartphone market with its partnership with Nokia (NOK). He also notes that it is trading at a discount as the market isn't giving them credit for their solid position in cloud computing.

Einhorn also said that CEO Steve Ballmer doesn't care what Wall Street thinks and that could possibly be a good thing. However, he conceded that Ballmer is "stuck in the past" and said that Ballmer's "continued presence is the biggest overhang on Microsoft's stock." It's very clear Einhorn wants Ballmer fired.

We've also detailed Greenlight Capital's recent letter to investors for insight into their new positions in Yahoo! (YHOO) and Best Buy (BBY).


Carl Icahn / Icahn Partners: The legendary rabblerouser began his presentation by saying he's made a fortune by studying natural stupidity. Icahn said that "activism" in the old-school sense of the word is dead; there aren't anymore true corporate raiders anymore. He says that there's tons of money to be made by shaking things up at a company.

He went on to talk about why he returned outside investor capital in his funds. He simply didn't want to be responsible for the losses of others like he was during the 2008 crisis. Icahn fears further problems will arise in the markets in a year or two. His pitch at the conference? His holding company: Icahn Enterprises (IEP).


Mark Hart III / Corriente Advisors: If you're unfamiliar with Hart, then all you need to know is that he created subprime mortgage and sovereign debt funds well before the crises happened, profiting handsomely from the events that followed.

In his speech, Hart said to short China and this isn't the first time he's made this case. He argues that it is a credit fueled bubble and there are many misconceptions out there. It seems his conviction is high here as he says that China's bust will be much larger than the Asian crisis in the 90's.

Hart argues that inflation will end China's credit growth. This isn't the first time we've seen this argument. Hedge fund Kleinheinz Capital has in the past said that inflation is the biggest threat to emerging markets. Coincidentally, both Kleinheinz and Corriente operate out of Fort Worth, TX. Lastly, Hart mentioned he was buying puts on the renminbi.


Jeffrey Gundlach / DoubleLine: He used an Andy Warhol car crash painting as an illustration for the housing market. He said that Bank of America $BAC is a proxy for the ABX and says it's going lower. Gundlach likes natural gas.

Interestingly enough, Gundlach said that gold is too heavy to carry around to use as a form of currency to pay for things. Instead, he said to use gems to protect against a crash and uncertainty because they are more portable, noting that you can carry a ruby in your shoe. Gundlach prefers holding cash or gems instead of gold or silver.

As an aside, it's worth noting that diamond prices have been heading higher in recent months. They are not a publicly traded commodity and high demand from India and China seems to be driving prices there.


Marc Faber / Gloom Boom & Doom Report: Faber is very clearly not a fan of Ben Bernanke. He says that the Federal Reserve Chairman is a student of history regarding the Depression, but that Bernanke unfortunately doesn't know what caused it. Faber notes that as the Fed prints more money, cash and bonds obviously aren't good investments. He also joked that if everyone at Ira Sohn complained, Bernanke would come in and drop a trillion dollars right there.

Faber said not to own US government debt, even if the deflationists end up being right. He is also an advocate of owning gold but not storing it in one place. Faber says you need to store gold all over the world in Australia, Switzerland, etc. He also disputed Gundlach's notion to own gems over gold and said people will always value gold, even if you're in a jungle or desert because everyone knows what it is.


Steve Feinberg / Cerberus: He pitched residential mortgage backed securities (RMBS) as a compelling opportunity and labeled them 'cheap,' given the high amount of underwater loans and depressed home prices.


Peter May / Trian Fund Management: Peter May of Nelson Peltz's Trian Fund pitched upscale jeweler Tiffany & Co (TIF), citing "enormous price appreciation" ahead. Catalysts for TIF include new store openings, vertical integration, new watches, and increased analyst coverage and he said shares could see $100 (they currently trade around $70.)


If you missed it, be sure to also check out part 1 of our notes from Ira Sohn featuring investment ideas from Jim Chanos, Phil Falcone, Dinakar Singh and more.

Ira Sohn Conference Notes: Hedge Fund Manager Presentations

The Ira Sohn Conference is taking place today in New York and features an all-star line-up of hedge fund managers. This post features part 1 of our notes from their presentations. ***Update: We've also posted up part 2 of our notes from Ira Sohn as well.

Part 1:


Erez Kalir / Sabretooth Capital: His pick was a long of MBIA (MBI) as a 'favorably asymmetric' play. His presentation was entitled, "Economic Death as a Special Situation." He feels that MBIA has 100%-200% upside with only 30% downside at worst, so the risk/reward skew is favorable.

He also likes Argentina as a compelling investment arena since its default in the early 2000's. In particular, he's looking at energy exploration & production names. He points to stocks like YPF SA (YPF) and Crown Point Ventures (CWV).

On the topic of inflation hedging, Kalir doesn't like gold. In fact, he warned against owning it. He also dislikes shorting treasuries. Instead, he prefers to buy farmland. This stance no doubt echoes the sentiment of Jim Rogers, the ex-Quantum fund manager who has also been a staunch advocate of owning farmland. Additionally, we've detailed how subprime profiteer Michael Burry also bought farmland.


Dinakar Singh / TPG-Axon Capital: Singh thinks the current market is a great environment for stockpicking and fancies shares of wireless provider Sprint (S), which David Einhorn's Greenlight Capital also likes (see Einhorn's thoughts here). Singh cites the company's low valuation and it's his favorite turnaround story.

He says S needs to consolidate its two networks starting now with the next generation phones. Singh actually feels like the T-Mobile / AT&T (T) merger is good for Sprint because it removes their largest competitor. Singh notes that the US wireless market could offer defensiveness like utility stocks, but with the added benefit of growth. He thinks S could have 40-70% upside, saying its worth $8-14 per share (currently trading around $6).

TPG-Axon's leading man cited Zhongpin (HOGS) as a compelling investment due to its top line growth and the fact that it's trading at 7x earnings.

Singh also mentioned he thinks that Orkla (OSL: ORK) has a fair value of $65 to $80 as the company was mismanaged and restructuring could unlock value.


Jeff Aronson / Centerbridge Partners: His pick was to go long shares of CIT Group (CIT). This has been a hedge-fund-favorite as some of the largest owners also include Bruce Berkowitz's Fairholme Capital, Howard Marks' Oaktree Capital, David Einhorn's Greenlight Capital, Marc Lasry's Avenue Capital, and Dan Loeb's Third Point. Before Chapter 11, Centerbridge was buying CIT debt. Since then, they've been buying the equity.

Aronson says that the company's intrinsic book value is $59 per share and notes that they have $12 billion in cash on their balance sheet. He highlights that CIT has publicly stated it could buy a retail bank (whose deposits would boost earnings). As a takeout candidate, Centerbridge thinks CIT could be worth as much as $65 (shares trade around $41 currently.)


Robert Howard / KKR: Howard (representing KKR's new equity team) pitched shares of Wabco (WBC), a company that produces anti-lock braking systems among other things. He cites three major trends that WBC can benefit from: cyclical recovery (US & Europe trucking recovery), emerging market growth, as well as tighter safety rules. Howard mentions the company is often overlooked by investors too.

KKR's man also pitched HSN, Inc (HSNI), otherwise known as the Home Shopping Network. He likes their demographic of 30-55 year old women with solid annual income to spend. Howard thinks that John Malone's Liberty Media could make a play for the company too, as he points out that Liberty owns 30% of HSNI and all of QVC, the other major player in the shopping-via-television arena.


Phil Falcone / Harbinger Capital Partners: Falcone talked about his wireless venture, LightSquared. We've covered this play numerous times and while it's not publicly traded yet, Falcone says that it will be some day. Essentially, this is Harbinger's concentrated bet on a 4G network.

Numerous hedge funds have invested in the 'more mobile data usage' theme via various plays. Some have elected to buy the wireless tower operators like American Tower, (AMT), Crown Castle (CCI), and SBA Communications (SBAC). Falcone, on the other hand, has elected to straight up build out his own network as his hedge fund has morphed into a semi-private equity-like fund. He noted that they've accumulated spectrum and are looking at a 4G terrestrial network.

Falcone also likes Crosstex Energy (XTXI). We covered his investment in XTXI back in December and the Harbinger manager likes it due to its complex financial structure. A master limited partnership owns the assets and then XTXI owns that partnership. He drew attention to the fact that this isn't a company that pulls gas out of the ground, but rather a play on gas processing and transmission. Falcone thinks XTXI is worth double what it's trading at now or more (around $9.50 currently).


Jim Chanos / Kynikos Associates: The well-known short-seller attacked alternative energy 'green' plays with a presentation entitled, "Does Solar and Wind = Hot Air?" Chanos said that, "wind is 50% more expensive than natural gas, and solar is 4 times more expensive" and that natural gas prices have essentially shot an "economic arrow" into alternative energy.

In particular, Chanos mentioned Denmark-based Vestas (CPH:VWS or PINK: VWDRY), a company focused on wind power that might be worth looking at for a short.

However, he is most excited about shorting solar power via First Solar (FSLR), a company he believes has outdated technology. Chanos was recently on television talking negatively about this name as well. He points out that Spain and Italy utilize solar power the most. But, the problem there is that the demand is highly subsidized. Also, he points to the management exodus at FSLR as a warning sign for investors to exit shares.


Sunjay Gorawara / Investment Idea Contest Winner: This year's Ira Sohn featured an investment idea contest where the winner was able to present their idea to all attendees. Michael Price introduced the contest winner but while he was talking, he mentioned that Goldman Sachs (GS) could be a buy as it should be worth $100 more than where it currently trades. And in general, he was bullish on financials.

Judges Bill Ackman, David Einhorn, Michael Price, and Joel Greenblatt selected the winning entry of Bridgepoint Education (BPI) from an undergraduate student at Indiana University who will be interning at JP Morgan this summer.

For more hedge fund coverage: Be sure to receive our free updates via email or free updates via RSS reader.


This concludes part 1. Please head to part 2 of our notes from Ira Sohn for coverage of presentations from David Einhorn, Bill Ackman, Carl Icahn and more.

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John Thaler's JAT Capital Bets on Social Media with Sina (SINA) Position

John Thaler's hedge fund JAT Capital has been buying shares of Sina Corp (SINA) hand over fist. Per a 13G filed with the SEC, the hedge fund has disclosed a 5.6% ownership stake in SINA with 3,384,385 shares.

JAT has doubled its position and then some in the past few weeks as they only owned 1,455,995 shares at the end of March. And before that at the end of December, they only held 513,920 shares. Over the past six months, JAT Capital has ramped up its position by almost 560%.

Social Media Investing Boom

Sina Corp is at the crossroads of two hot investing trends: social media and China. SINA is essentially the 'Twitter of China' and with the recent LinkedIn (LNKD) IPO, the social media investing boom is here. By the way, don't forget to follow @marketfolly on Twitter for intra-day commentary and further hedge fund coverage.

Per Google Finance, Sina Corp is "an online media company and MVAS provider in the People’s Republic of China (PRC) and the global Chinese communities. The Company provides services through five business lines, including SINA.com (online news and content), SINA Mobile (MVAS), SINA Community (Web 2.0 and social networking-based services and games), SINA.net (search and enterprise services), and SINA E-Commerce (online shopping)."

About John Thaler/JAT Capital

Before founding JAT Capital in 2007, Thaler worked at Shumway Capital Partners where he was responsible for covering technology, media and telecom and he managed the internal Omni fund. Prior to that, he worked in private equity at Spectrum Equity Investors.

Due to this experience, it should come as no surprise that Thaler employs a fundamental research process and private equity-like approach to investing with an emphasis on tech. Thaler earned his BA in Economics from the University of Chicago.

In 2008, JAT returned -5.9% (compared to -37% for the S&P) and in 2009, Thaler's fund returned 23.2% gross.

Scout Capital Discloses Sensata Technologies (ST) Stake

James Crichton and Adam Weiss' hedge fund Scout Capital just filed a 13G with the SEC on shares of Sensata Technologies (ST). Based on portfolio activity on May 13th, 2011, Scout has disclosed a 5.02% ownership stake in ST with 8,750,000 shares.

At the end of the first quarter (March 31st), Crichton and Weiss' hedge fund owned 8,200,000 shares so this marks only a 6.7% increase in their position size.

However, Scout just revealed their position in Sensata equity as a new holding in the first quarter. As such, all of their buying in the name has been within the past five months. They also recently started an Arcos Dorados stake (ARCO).

Scout isn't the only hedge fund that has recently disclosed a position in Sensata equity. As noted in the brand new issue of our newsletter, John Griffin's Blue Ridge Capital started a new stake in the quarter and Alan Fournier's Pennant Capital was adding to its position as well.

Per Google Finance, Sensata Technologies is "The Company is engaged in the development, manufacture and sale of sensors and controls. It produces a range of sensors and controls for mission-critical applications, such as thermal circuit breakers in aircraft, pressure sensors in automotive systems, and bimetal current and temperature control devices in electric motors."

John Griffin's Blue Ridge Loads Up on Level 3 Communications (LVLT)

John Griffin's hedge fund Blue Ridge Capital has filed a 13G with the SEC on shares of Level 3 Communications (LVLT). Due to portfolio activity on May 13th, Blue Ridge has disclosed a 5.74% ownership stake in LVLT with 97,805,000 shares.

This marks a whopping 434% increase in their position size. Griffin's firm owned 18,305,000 shares back on March 31st, so the recent addition took place somewhere within the past two months. We've just detailed the rest of Blue Ridge's updated portfolio in the new issue of our newsletter: Hedge Fund Wisdom.

Per Google Finance, Level 3 Communications is "is engaged in the communications business. The Company is a facilities based provider of a range of integrated communications services."

To learn to invest like Griffin, check out Blue Ridge's recommended reading lists.

Soros Fund Management Buys More Microstrategy (MSTR)

Soros Fund Management just filed a 13G with the SEC regarding shares of Microstrategy (MSTR). Per portfolio activity on May 10th, George Soros' firm has disclosed a 5.67% ownership stake in MSTR with 454,595 shares.

This marks a 34% increase in their position size. Back on March 31st, they owned only 338,384 shares. Per Google Finance, Microstrategy "is a worldwide provider of business intelligence software that enables companies to report, analyze and monitor the data stored across their enterprise."

We just detailed George Soros' updated portfolio and you can view the rest of his investments in our new issue of Hedge Fund Wisdom that was just released yesterday.

Jeff Saut's Favorite Investment Ideas

Market strategist Jeff Saut's latest commentary is out and he focuses on some of his favorite investment ideas. They are:

Wiliams Companies (WMB): He writes that, "Our bullish thesis on Williams is supported by three main points: (1) we believe the company's E&P assets will garner a higher valuation in the market place as a stand-alone entity when the company splits itself into two parts; (2) we believe the market is undervaluing Williams' ownership of the Williams Partner GP, and (3) we expect strong growth from the Canadian midstream assets."

Market Folly readers will recall that Dan Loeb's Third Point outlined this exact WMB thesis as well, as the stock seems to be a hedge-fund-favorite.


Clayton Williams (CWEI): Saut notes, "What does set Clayton Williams apart from the rest of the group is its highly oil-weighted production profile (74%), growing position in high-return oil plays (namely the Permian and Delaware Basin), and cheap valuation. Raymond James Analyst John Freeman last week reiterated his Outperform rating on Clayton Williams and stated that he viewed any pressure in the stock as a buying opportunity."

In his commentary, Saut also explains the rationale behind bullishness on shares of Iberiabank (IBKC), and Equinix (EQIX).

He also points out some of the latest hedge fund moves from 13F filings. While he notes that HCA Holdings (HCA) was one of the largest new buys in the past quarter, he fails to mention that it was because the company had its initial public offering. To see what hedge funds have been buying, we of course point you the new 91-page issue of our Hedge Fund Wisdom newsletter.

For Saut's favorite stocks, you can download a .pdf copy here.

What We're Reading ~ 5/23/11

The new issue of our newsletter: Hedge Fund Wisdom [Market Folly]

Hedge fund panel with Jamie Dinan, Izzy Englander & Lee Ainslie [Dealbreaker]

Three things that are bottoming [Reformed Broker]

The scuttlebutt method of stock research [Bronte Capital]

15 fundamentals to win the battle with the market [Kirk Report]

UltraShort 20 year treasury ETF performance simulator (TBT) [Symmetric Info]

Why a pair of Crox cost me $1 million [Leigh Drogen]

Eddie Lampert's Sears cult supporters [GLGroup]

Audio of S&P futures pit during flash crash [Big Picture]

Five disciplines of great investors [WashingtonPost]

Real median incomes versus supermarket stocks? [Barbarian Capital]

Kyle Bass: elite hedge funds getting special treatment [BusinessInsider]

SAC Capital readies quant fund; first new offering in six years [FINalternatives]

How Bruce Berkowitz stumbled with AIG [Fortune]

Berkowitz: "I was wrong" [WSJ]

Jim Cramer hits an all-time high [NYTimes]

Poker players nearly as skilled as baseball players [HuffPo]

Burger Wars: In-N-Out vs Five Guys vs Shake Shack [SeriousEats]

New Issue of Our Hedge Fund Wisdom Newsletter Just Released!

The Q1 2011 issue of MarketFolly's premium Hedge Fund Wisdom newsletter has just been released! Current subscribers please login at hedgefundwisdom.com to download it.

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Third Point Adds To Xerium Technologies (XRM) Position

Dan Loeb's Third Point LLC just filed an amended 13G with the SEC regarding shares of Xerium Technologies (XRM). Due to portfolio activity on May 5th, Third Point has revealed a 11.3% ownership stake in XRM with 1,700,000 shares.

This marks an increase in their position size of 18%. Loeb's fund held 1,436,405 shares at the end of 2010. The company recently announced a plan to refinance its credit facilities. For more on Third Point, check out our post on their latest exposure levels as well as their focus on spin-outs.

Per Google Finance, Xerium Technologies is "a global manufacturer and supplier of two types of consumable products used primarily in the production of paper: clothing and roll covers."

To learn to invest like this manager, head to Dan Loeb's recommended reading list.

Baupost Group Doubles Aveo Pharmaceuticals Stake, Trims BreitBurn Energy Partners

Seth Klarman's Baupost Group recently filed two 13G's with the SEC. Baupost's equity activity is pretty minimal so it's always an interesting treat when they have some activity. We also covered some of Klarman's thoughts in Baupost's year-end letter.

Aveo Pharmaceuticals (AVEO)

First, due to trading on April 30th, Baupost has disclosed a 11.77% stake in Aveo Pharmaceuticals (AVEO) with 4,221,010 shares. Baupost has doubled its stake in the company. They originally started a brand new position in the name back in the fourth quarter with 2,000,000 shares.

BreitBurn Energy Partners (BBEP)

Second, due to trading on the same day, Klarman's firm has also revealed a 4.23% stake in BreitBurn Energy Partners (BBEP) with 2,500,000 shares. This marks a decrease in their position size of 42.5% as they owned 4,350,000 shares at the end of 2010.

To see the rest of Klarman's recent equity activity, be sure to subscribe to our Hedge Fund Wisdom newsletter as a new issue is just around the corner.

Per Google Finance, Aveo Biopharmaceuticals is "a biopharmaceutical company focused on discovering, developing and commercializing cancer therapeutics. Its product candidates are directed against mechanisms known to be involved in cancer."

BreitBurn Energy Partners is "an independent oil and gas partnership focused on the acquisition, exploitation and development of oil and gas properties in the United States."

For from this manager, be sure to read through a collection of Seth Klarman's Baupost Group letters.

Eminence Capital Adds to Novellus Systems (NVLS)

Ricky Sandler's hedge fund Eminence Capital just filed a 13G with the SEC regarding shares of Novellus Systems (NVLS). Per trading activity on April 29th, the hedge fund has disclosed a 6.3% ownership stake in NVLS with 5,623,442 shares.

This marks almost a 66% increase in their position size. At the end of 2010, they owned 3,390,000 shares of NVLS. It looks as though Eminence added to their stake on the recent sell-off after the company's guidance missed analyst estimates. Novellus recently announced the pricing of $600 million senor convertible notes due 2041.

Sandler started Eminence after previously being an analyst at Mark Asset Management. In the past, he also started Fusion Partners at 25 with Wayne Cooperman. As their investment styles differed, Sandler started Eminence.

He employs a 'quality value' approach by spending equal amounts of time on the long and short side of the portfolio. Eminence employs gross leverage and typically runs 120% long and 70% short. Last year we saw that Eminence favored high quality large caps.

Per Google Finance, Novellus Systems "together with its subsidiaries, develops, manufactures, sells and supports equipment used in the fabrication of integrated circuits, commonly called chips or semiconductors."

Market Folly's 3rd Anniversary

Things have been so hectic we missed our own anniversary a few weeks ago. Founded in April 2008 in the midst of the worst financial crisis since the great depression, MarketFolly.com has come a long way.

Milestones In 2010

Last year the site received over 2.1 million unique visitors and over 3.3 million hits. Market Folly now has over 13,900 subscribers, a 56% increase over last year. If you don't already, be sure to receive our free updates via email or via RSS reader.

We also started a premium quarterly newsletter, Hedge Fund Wisdom. It tracks the portfolios of 25 top hedge funds and provides in-depth analysis of their latest investments, telling you what they bought and why. Our new issue is only a few weeks away so check out a free sample in the mean time.

A Thank You & Request

Thank you for reading, sharing, and interacting. We're always trying to improve the site so please feel free to send feedback, suggestions, and criticism (brutal honesty always welcome).

Want to see a particular hedge fund tracked? Let us know! Have access to hedge fund letters? Send them over! Rest assured, contributions are always treated as anonymous and confidential.

- Send us an email

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Thank you again for your readership and we'll leave you with the quote that inspired the site's name:

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

Corsair Capital Anticipates Increased M&A Activity: Investor Letter

Jay Petschek's Corsair Capital Management is one of our favorite funds to track. Corsair returned 6.0% net in the first quarter and has seen 15.5% annualized returns since inception in 1991. Their latest investor letter updates us on their market view and some of their positions.

They write, "The global economy’s strength leads us to believe companies will exit the sidelines with renewed confidence and deploy cash for strategic acquisitions. Market multiples remain below historic averages and the capital markets are open; companies can now afford to strategically position themselves to benefit from higher growth in emerging markets, gain access to resources, improve cost structures, and so forth."

Post Reorganization Companies

In the past, we've highlighted how John Paulson is betting on restructured equities. We've also detailed that Dan Loeb's portfolio holds post-reorg equities. Corsair also likes this play, but they've invested in names we haven't seen discussed in manager commentaries before.

In particular, Corsair owns Six Flags (SIX), which emerged from bankruptcy in May of last year. Their thesis is predicated on management's ability to reinvent the business model and improve profitability. They also point to large insider buying.

They also own Reader's Digest, another company recently emerged from bankruptcy. While some have left the publishing industry for dead, investors should be cognizant that the company "derives less than 8% of its earnings from the Reader's Digest Magazine."

Corsair's letter also details updates on their positions in Globe Specialty Metals (GSM), Innophos (IPHS), Keystone (KYCN), and Schweitzer-Mauduit (SWM). It also contains a detailed write-up on their new investment in IDT Corp (IDT), which they believe is worth $38-57 on a sum-of-the-parts valuation (a 50-130% return).

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



Be sure to check out other hedge fund letters we've posted up, including David Einhorn's Greenlight Capital and Lee Ainslie's Maverick Capital.

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.