Follow A Hedge Fund Manager's Portfolio

Today we're excited to announce that Market Folly readers receive an exclusive 10% discount to Dasan Stock Digest, a publication that provides the portfolio trades of a successful hedge fund manager.  Receive 10% off by entering the following discount code at checkout: marketfolly10

We've been reading Dasan Stock Digest for a few months now and can personally vouch for it as a high quality source of information with an actionable portfolio. Dasan provides rationale behind each position bought or sold as well as detailed industry metrics. Dasan returned 65.4% last year versus 15.06% for the S&P 500.

What's Included in Dasan Stock Digest?

- Investment alerts notifying subscribers what he is buying and selling
- Monthly update on the investments in the portfolio
- Monthly reports on the technology and gaming industries
- Focus reports on individual stocks

Portfolio Manager Background

The portfolio manager spent 13 years at UBS and Merrill Lynch, 4 years as a tech analyst and a portfolio manager at a hedge fund, and attended Columbia Business School's value investing program.

Research Example: Apple (AAPL)

Since Apple is one of the most popular stocks among hedge funds, we wanted to present Dasan Stock Digest's update on AAPL including earnings summary, model, conference call notes, & more. Embedded below is an example of the type of research you'd receive:





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What We're Reading ~ 1/28/11

RenTec's quant master Jim Simons speaks [Dealbreaker]

On the topic of hedge fund herding [AbnormalReturns]

Funny post: insight from top newsletters [Reformed Broker]

Lessons from 2010 [KirkReport]

Mark Cuban: Wall Street's new lie is asset allocation [BlogMaverick]

The ideal position size [SINLetter]

Summary of Barron's roundtable [StoneStreetAdvisors]

Emails suggest Bear Stearns cheated clients out of billions [TheAtlantic]

Do you believe in the Bernanke put? [Humble Student of the Markets]

Comprehensive overview of market sentiment [Trader's Narrative]

John Paulson recaps big bets [Dealbook]

For small hedge funds, success brings new headaches [Dealbook]

A rare bearish piece on Apple (AAPL) [WSJ]

Paulson's new fund seeks dollars in the desert [Marketwatch]

Back to the future with Clarium Capital's Peter Thiel [National Review]

Bullish on Waste Management (WM) [Seeking Alpha]

Update on Tiger Global's private equity funds [Bloomberg]

Tiger's Robertson seeds Nezu Asia funds [Reuters]

Zeke Ashton on Centaur Capital's Investment Approach: Interview

Zeke Ashton is the founder of Centaur Capital Partners in Dallas, Texas. He focuses on long/short equity value investing and has compounded at 16% per annum since inception in 2002. His interview focuses on his non-traditional entrance into the hedge fund industry as well as his focus on 'hated' stocks.

Ashton started out in the Treasury and risk management consulting business. And, like so many value investors, he later shifted to investing after discovering Warren Buffett. Ashton actually worked at The Motley Fool for a while where he refined his skills with the basics and crafted his own investing style.

Ashton started with less than $1 million but attracted the likes of Whitney Tilson (of hedge fund T2 Partners) as an investor. Today, he manages $110 million and we've covered Ashton's presentations at the Value Investing Congress as well.

Centaur's Investment Approach

Ashton likes a concentrated portfolio, but not extreme concentration. He likes the 20-stock model and while he does short, he is long-biased. He often holds 20 longs and 6-8 shorts. Typically, he avoids cyclical and leveraged businesses and prefers companies that hold a lot of cash and generate a lot of cash.

The hedge fund manager's picks are often found in a pocket of opportunity nestled between growth and value. The stocks Ashton typically invests in don't grow fast enough to attract growth investors and aren't cheap enough for deep value players. As Ashton says, "boring is beautiful."

OpalesqueTV sat down with Ashton and the video interview is embedded below (email readers come to the site to view it):



We've posted up some other great hedge fund interviews, including Phil Goldstein of Bulldog Investors and David Gerstenhaber of Argonaut Capital.

Kleinheinz Capital: Inflation is Biggest Threat to Emerging Markets

John Kleinheinz's hedge fund Kleinheinz Capital recently sent out its year-end market commentary and 2011 outlook. The focus? Emerging markets and why inflation is the biggest threat to the belief that those countries can rebalance global growth.


Emerging Markets / Developing Economies

In the hedge fund's third quarter commentary, Kleinheinz said Russia is the cheapest emerging market. Their commentary this time around focuses on developing nations in general. They feel that food inflation is a large threat as it causes social unrest. However, the most important reason inflation is a concern is because,

"if developing economies cannot grow at above trend levels in a non-inflationary way then the whole proposition that these economies can gently rebalance the world economy may be untrue. The above average rates of growth in markets like China may simply be the result of trade surpluses that arise from lower cost of labor and fast monetary growth spurred by large domestic and foreign investment in capacity. Without real productivity advances and a migration to higher value-added products and services, which would allow higher incomes, the citizens of those countries cannot be expected to upgrade to a Western lifestyle that favors consumption over savings."


End of Bull Market in Treasury Bonds?

Another interesting focus of Kleinheinz's year-end letter is the notion that the three decade long bull market in US Treasuries is over. In the past, Kleinheinz held some bonds as a hedge. However, they sold out of those positions in the third quarter of last year.

Since then, they've begun "tactically shorting bonds ... until we become more certain about the timing and magnitude of a secular decline in longer dated bonds."


Japanese Yen

On the other side of the spectrum, the hedge fund has also started short positions in the Japanese Yen and Japanese government bonds. The rationale behind the play?

"Simply put - because Japan cannot afford to let its interest rates go higher, its currency will likely go lower to adjust interest rate differentials, slowing trade surplus and dwindling savings."

Readers will recall that hedge fund colleague Kyle Bass is short Japanese government bonds as well.


At the end of 2010, here were Kleinheinz's Top Holdings:

1. Apple (AAPL)
2. Research in Motion (RIMM)
3. China Mobile (CHL)
4. Veeco Instruments (VECO)
5. Monsanto (MON)
6. Hong Kong Exchange & Clearing (HK:0388)
7. LUKoil Holdings
8. Google (GOOG)
9. Major Drilling Group (MDI)
10. Yahoo! (YHOO)

From the third quarter to the fourth quarter, the most notable change in the upper echelon of their portfolio was Baidu (BIDU) falling just outside of the top 10 and their position in VECO ramping up a few spots.

Since inception, the fund has seen a compound annual growth rate of 26.6%. Intriguingly, you can replicate Kleinheinz's portfolio via Alphaclone. Investing in Kleinheinz's top 10 US equity holdings returned 19.5% 2010 compared to the hedge fund's actual performance of 22.86% (get free access to Alphaclone here).

To conclude, we'll leave you with a quote from John Kleinheinz's letter that stuck out the most: "A broad correction in stock market multiples will only occur if ten year U.S. government bond rates exceed 5% and corporate earnings growth slows to low single digit levels."

Phil Goldstein of Bulldog Investors on Activist Investing: Interview

Phil Goldstein and Andy Dakos of Bulldog Investors approach markets from a value investing bent and often employ activist strategies. Since 2001, their Full Value Partners LP has returned 10.03% annualized net.

Goldstein actually started working as a civil engineer and didn't start his investment career until his late 40's. He started managing money on the side in 1992 and finally pursued his passion full-time. He and Steve Samuels started Opportunity Partners with $700,000 and joined up with protege Andy Dakos.

While originally focusing on closed-end funds trading at discounts to net asset value (NAV), the firm eventually transitioned to focusing on other plays that traded at large discounts to intrinsic value, including REITs and operating companies. They also began to focus on using activist strategies as a catalyst to unlock value. In particular, they honed in on liquidity events such as asset sales, mergers, etc.

Nowadays, they see opportunity in junior gold miners (not because of macro theses, but rather sheer discounts). Also, they see opportunity in mergers and acquisitions (M&A).

Embedded below is the video interview with Phil Goldstein and Bulldog Investors from OpalesqueTV (email readers come to the site to watch):



For other great hedge fund manager interviews, check out David Gerstenhaber of Argonaut Capital on risk management.

Why A Hedge Fund Manager Sold Sprint Nextel (S)

The following is extracted from Amit Chokshi's Kinnaras Capital Management fourth quarter letter:

"Investors may also be curious regarding the divestiture of Sprint-Nextel ("S"), our highest conviction holding in 2010. When Greenlight Capital founder David Einhorn revealed a stake in Sprint Nextel in early December (a few weeks after we had sold), I received a few "what do you think about that" emails, not surprising when one considers Greenlight Capital's 21.5% annualized return since inception in 1996. One of the reasons I sold S was simply due to a flurry of much more attractive prospects that arose in Q3. The limited capital we control allows us to invest in any segment of the market and I wanted to take advantage of that opportunity in Q3.

Nonetheless, I would have considered holding on to a small stake in S if I had greater confidence in its management team, marketing efforts, and competitive dynamics. When establishing our stake in S in early 2010, one component of my investment thesis was the head start S had on its rivals in deploying next generation ("nextgen") cellular capabilities. S's 4G service is provided through its majority stake in Clearwire ("CLWR"). S would also be releasing two spectacular phones using Google's Android Operating System in the summer -- the HTC EVO ("EVO") and Samsung Epic. Sales data was demonstrating that Android phones were gaining considerable momentum and the EVO and Epic were two of the most widely anticipated smartphones of 2010.

Heading into 2010, S would be the first to 4G with a significant lead time over its rivals, had two highly rated phones that could compete against any of the top smartphones, had a very compelling price point relative to other carriers, experienced massive improvements in customer service, and had already demonstrated success in rationalizing parts of its business to drive operational improvements. S also faced few financing constraints with most of its debt maturities far into the future. The stock was cheap across a number of valuation metrics and had a number of catalysts in place that could drive improvements in valuation.

Here's where the train started to get off the tracks. The telecom business is highly competitive and I believe companies have to go for the jugular when it comes to advertising to demonstrate their key strengths over their competitors. For example, Verizon ("VZ") directly mocks AT&T's ("T") network coverage in its television ads, leading the viewer to believe that VZ has the best coverage while T has overpriced and weak network coverage. S intended to release the EVO in June and a number of third party sources considered it to be the best smartphone available. S had for the first time a legitimate top-shelf product and had also developed a very competitive pricing plan offering far more value to a subscriber relative to VZ and T. I had expected some aggressive and smart advertising to promote the EVO functionality and S phone plans directly against its competition.

Instead there appeared to be little to no advertising until the final two weeks of the release and the marketing was very mundane. Effective marketing "shows" rather than "tells" and the EVO commercials were far too convoluted, doing nothing to effectively demonstrate the powerful capabilities of the phone. The video below is one of the initial EVO commercials and should illustrate my point (email readers will need to come to the site to view the videos):



I felt S had squandered a huge opportunity when there were no other competitors to market leading up to the introduction of the EVO and from that point on I began to question S's advertising efforts. For example, S runs advertisements before the coming attractions start in movie theaters. As theaters are usually pretty empty before the coming attractions start, I would wonder how effective the use of these ad dollars were in attracting new subscribers. I also was skeptical of the company's sponsorship of CBS's NFL halftime show and sponsorship of the Sprint Cup for NASCAR. My personal view was that S could be far more effective with advertising that demonstrates what its network and exclusive phones could do rather than spend ad dollars on blanket sponsorship.

The next problem arose with S's handling of CLWR. CLWR is majority owned by S but was also competing directly against its parent company by offering CLWR-branded service as well as specific connection devices such as the iSpot which competed against the S Overdrive. Considering that CLWR burns considerable cash, much of it from S, it was bizarre that S sat idly by for so long allowing CLWR to use S cash to develop products to compete against its parent. In Q4 it became apparent that CLWR would need more capital setting up additional tension between S and CLWR.

At this point S needs CLWR as it provides S with its 4G service but CLWR will still require billions to further expand coverage in the US. It will be challenging for S to fund CLWR's needs while also executing its own capital spending plans. S took far too long to decide to rationalize its iDEN and CDMA networks but it intends to start in 2011. This project will require billions and excludes the roughly $2B+ needed on maintenance capex and FCC license expenditures. These are not immaterial expenditures considering S generates under $6B in EBITDA.

What exacerbates this problem is that competitors are now coming to market with 4G services. While S had a large lead in terms of time, it squandered that lead with ineffectual marketing and poor management of CLWR. The company has a compromised operational and financial strategy and is now facing competition with far better marketing and deeper resources.

For example, S marketing executives could learn a lot from T-Mobile. T-Mobile has released some excellent ads which are exactly what I envisioned S would have done but did not. The T-Mobile ads copy the "I'm a Mac, I'm a PC" commercials Apple developed whereby T-Mobile goes directly after AT&T and the iPhone, highlighting AT&T's poor network performance and limitations of the iPhone 4. S could easily have done similar ads but for whatever reason, S CEO Dan Hesse has been reluctant to highlight any design and operational advantages the EVO and Epic have over the iPhone or the S network has over competitors. T-Mobile has had no such qualms and it would be little surprise if sales of T-Mobile 4G devices (even though T-Mobile really does not have 4G) accelerate due to the smart advertising (video below):



Aside from T-Mobile, VZ is also beginning to market its 4G service. VZ has the deepest pockets of US telecoms and will be rolling out its coverage network at an aggressive clip while S and CLWR struggle to address financing and operational aspects. In addition, 4G smartphones appear to be slated for wide availability across carriers in 2011. While the EVO and Epic were two of the best phones released in 2010, there are a host of very impressive phones set to be released in 2011 such as the Motorola Droid BIONIC, Samsung 4G LTE Smartphone (nextgen Galaxy S), and HTC Thunderbolt. What will make this challenging for S is the cost subsidies associated with increasingly advanced phones will not be as easily absorbed by S relative to its peers as the Company's current plans yield lower ARPU relative to its peers. This could result in further margin pressures.

When entering 2010, S has a number of tangible opportunities and I felt if the company successfully executed on these, operations would improve significantly and thus yield a better valuation for the stock. S had its chances but I believe they missed what was essentially the one "open year" they had to increase subscribers with a relatively light competitive field. As Q3 and Q4 passed, the window between S and its competition was virtually eliminated. I expect that 2011 will be a year where its deeper pocket rivals like VZ flex their muscles and offer 4G services with other attractive smartphones. S may still pay off handsomely for investors but I felt we had better places to invest and that the outlook for S was getting increasingly more challenging.

Disclosure: Author manages a hedge fund and managed accounts with no position in any of the companies mentioned above. "

The above was extracted from Amit Chokshi and Kinnaras Capital Management's fourth quarter letter.

David Gallo's Valinor Starts Stake in Swift Transportation (SWFT)

David Gallo's hedge fund firm Valinor Management just filed a 13G with the SEC to disclose a brand new position in Swift Transportation (SWFT). Per portfolio activity on December 16th, 2010, Valinor shows a 7.3% ownership in SWFT with 5,380,312 shares.

This is a brand new position for the hedge fund as Swift Transportation's initial public offering (IPO) took place on December 16th and Valinor most likely purchased shares in the IPO. The company recently reported a $48.3 million loss in the fourth quarter and attributed much of its loss to debt refinancing transactions and IPO related expenses.

Earlier this week we detailed some other recent portfolio activity from Valinor as well for those interested.

Per Google Finance, Swift Transportation "formerly Swift Holdings Corp., is a transportation services company and a truckload carrier in North America. As of September 30, 2010, the Company operated a tractor fleet of approximately 16,200 units comprised of 12,300 tractors driven by company drivers and 3,900 owner-operator tractors, a fleet of 48,600 trailers, and 4,500 intermodal containers from 35 terminals positioned near major freight centers and traffic lanes in the United States and Mexico."

Keep tabs on the latest hedge fund movements with our analysis of the latest SEC filings.

Bill Ackman Joins J.C. Penney's (JCP) Board

Pershing Square's Bill Ackman recently appeared on CNBC and discussed the latest activity regarding his investment in J.C. Penney (JCP). Ackman will join JCP's board along with Vornado Realty Trust's (VNO) chairman Steven Roth. The retailer will also close some stores and get rid of its catalog business.

You'll recall that Ackman took an activist stake in JCP back in September. At the time, we also noted Vornado's sizable concurrent position as well. It appears as though the activist gears are in motion as the two attempt to shake up the large retailer. In the past, we opined that JCP was potentially a real estate play, but Ackman subsequently quashes that notion in the interview. While he acknowledges that the company has valuable real estate assets, he notes that they will 'live or die as a retailer.'

At the end of the interview, the hedge fund manager also mentions that he still has not sold any of his General Growth Properties (GGP) position either. This has been his most successful investment ever as he turned $60 million into $1.6 billion for his investors (and more).

Embedded below is Ackman's interview in CNBC (email readers will need to come to the site to view it):



We'll be detailing any recent portfolio activity from Pershing Square and analyzing their holdings in our new issue of Hedge Fund Wisdom that will be released in a few weeks.

Nelson Peltz's Trian Fund: Latest Portfolio Activity

Nelson Peltz's Trian Fund Management recently filed an amended 13D with the SEC regarding shares of Tiffany & Co (TIF). Due to portfolio activity on January 20th, 2011, Trian has disclosed a 4.95% ownership stake in TIF with 6,260,809 shares.

Tiffany & Co (TIF)

This is a decrease in their position as they reported their recent sales in a Form 4 with the SEC. Peltz's firm sold TIF shares on January 18th, 19th, and 20th at weighted average prices ranging from $57.9484 to $59.2843, with the bulk of their sale coming at the latter price. In all, Peltz recently sold 600,000 shares of Tiffany & Co.

Trian originally filed its activist 13D on Tiffany back in February 2007. Their latest amended 13D contains standard boilerplate stating that they intend to continually review their investment.

Peltz's Background

Peltz is a well-known activist investor and takeover titan. Additionally, he is the former owner of Snapple and graces the Forbes' billionaire list. Interestingly enough, Peltz never received his college degree. He attended the Wharton School at the University of Pennsylvania, but left to work in his family's business of selling food.

He attributes one of his most valuable lessons to his father, who simply said, "get sales up and keep expenses down." He has obviously incorporated this advice into his everyday work with turning around companies. In potential targets, Peltz likes companies to have the following attributes: a good franchise, low leverage, and strong free cash flow. Peltz runs Trian with his business partner, Peter May, who has been with him since the Snapple days.

Wendy's Arby's Group (WEN)

Peltz's Trian also owns a sizable position in Wendy's Arby's Group (WEN) and the fast food company has just announced that it is putting the Arby's sandwich chain up for sale. Arby's originally merged with Wendy's back in 2008. Trian owns over 24% of the company.

In other portfolio holdings, Trian owns sizable chunks of Legg Mason (LM), H.J. Heinz (HNZ), Family Dollar (FDO), and State Street (STT). Given Peltz's background, it should come as no surprise that he mainly focuses on the food industry.

Head to our hedge fund portfolio tracking to see what stocks managers have been active in lately.

Per Google Finance, Tiffany & Co is "a holding company and conducts all business through its subsidiary companies. The Company’s principal subsidiary, Tiffany and Company, is a jeweler and specialty retailer whose principal merchandise offering is fine jewelry. The Company also sells timepieces, sterling silverware, china, crystal, stationery, fragrances and accessories."

Per Yahoo Finance, Wendy's Arby's "through its subsidiaries, operates as the owner and franchisor of the Wendy's and Arby's restaurant systems."

Hedge Fund Valinor Management Adds to DSW Inc (DSW)

David Gallo's hedge fund firm Valinor Management just filed an amended 13G with the SEC regarding its position in DSW Inc (DSW). Due to portfolio activity on January 12th, 2011, Valinor has disclosed a 9.8% ownership stake in DSW with 1,634,361 shares.

Valinor has boosted its position size by 64%, buying 637,834 more shares over the past three and a half months. At third quarter's end (September 30th, 2010), they owned 996,527 shares. In other recent portfolio activity from Gallo, we've highlighted Valinor's new position in Cott (COT) as well.

Gallo's firm is named after lands inhabited by immortal souls from the books of J.R.R. Tolkien. Before founding Valinor, Gallo was at Roberto Mignone's Bridger Management and earned his MBA at Harvard Business School.

Per Google Finance, DSW Inc is "a branded footwear specialty retailer. As of January 30, 2010, the Company operated 305 shoe stores in 39 states in the United States. The Company offers an assortment of dress, casual and athletic footwear for women and men, as well as accessories through DSW stores and dsw.com."

For the latest in hedge fund portfolio activity, scroll through our coverage of SEC filings.

Strategist Jeff Saut on Fear, Hope, & Greed

Market strategist Jeff Saut's weekly commentary reiterates much of his stance that we've detailed over the past few weeks. He is cautious but a buyer of dips. And as we saw late last week, hedge fund manager David Tepper is also cautious but optimistic.

Simply put, Saut feels a pullback anywhere in the neighborhood of 3-10% is coming. The problem, of course, is that he's been waiting for a few weeks now. Saut revisits the age-old stock market cycle of fear, hope, and greed to illustrate his stance. He says that,

"I revisit the Fear, Hope and Greed cycle this morning not because I think we are approaching the Euphoric zone, but because I continue to believe we are near the Optimism level and therefore due for anywhere between a 3%-10% correction. Still, any pullback is probably for buying."

However, he is keen to sit patient and wait for his 'fat pitch' just like Warren Buffett would. Buffett's famous quote goes as such:

"In this game the market has to keep pitching, but you don't have to swing. You can stand there with the bat on your shoulder for six months until you get a fat pitch."

Classic words of wisdom from the Oracle of Omaha and we've detailed Warren Buffett's top 25 quotes if you're looking for more insight.

Embedded below is Jeff Saut's weekly investment strategy on the cycle of fear, hope, and greed:



You can download a .pdf copy here.

David Tepper Interview: "I Am Cautious But I Am Optimistic"

David Tepper, founder of hedge fund Appaloosa Management, appeared on CNBC this morning in an effort to raise awareness for his campaign to raise $15 million for the New Jersey community food bank (he's already raised $9m).

While he was there, he also of course shared his latest economic and market views. You'll remember that last time Tepper appeared on CNBC in September 2010, he was bullish on equities and his rationale inspired what many are calling the 'Tepper rally.' Since his comments then, the market has rallied more than 13%. Appaloosa's Thoroughbred fund returned 22% in 2010 and 100% in 2009. See how his numbers stack up against others in our post on 2010 hedge fund returns.

On the Economy

This time around, the Appaloosa hedge fund manager says that quantitative easing has worked and that the economy is better. Tepper also thinks that the unemployment situation will improve, but it won't get back to the lower levels quite seen before the crisis. He notes that the timing of the Federal Reserve's exit from its position of assistance will be important.

On the Market

Tepper also argues that S&P earnings multiples are still relatively low. With the S&P trading around 1,280 currently, he said he'd buy again... but at 1,000 (the same level where he was buying in September). Overall though, he is "cautious but optimistic." This attaches somewhat of a qualifier to the article yesterday that Tepper has turned cautious based on his comments in another interview. But at the same time, he notes that there's still uncertainty in other parts of the world (mainly European debt and China).

Tepper Likes Semiconductors

In terms of specific sectors and companies, he mentioned he likes semiconductors for 2011 and specifically cited Micron (MU). When he was interviewed in September, he mentioned that you could almost 'buy anything' since the Fed was pumping so much liquidity into the system. This time around, he says that you cannot simply 'buy anything' and you have to be more selective.

Regarding other investments Appaloosa currently holds, he mentioned he owns Banco Santander (STD) traded in Spain which we already knew from his Ira Sohn presentation in May 2010, but he also owns AIA, a subsidiary of AIG that recently IPO'd in Asia. We've noted that Bruce Berkowitz's Fairholme Capital participated in the AIA IPO.

Comments On His Dean Foods (DF) Stake

Tepper also talked about his new position in Dean Foods (DF). He likes the milk business in that Dean Foods has a dominant market position. But looking for areas of growth in the industry, he points to soy milk, almond milk, and organic milk and highlights that competitors aren't really doing anything there. Appaloosa thinks that the current milk squeeze (low retail prices) will be eliminated in the next year and they feel the company is cheap.

Embedded below is the video from his interview (email readers will need to come to the site to view it). Here's his thoughts on the macro environment and market in general:



And then here are Tepper's thoughts on more specific subjects like semiconductors, banking, and more niche topics:



To see what Tepper has been investing in lately, sign-up for our newsletter as his latest portfolio will be released in a few weeks.

Hedge Fund Farallon Sells Some Beacon Roofing Supply (BECN)

Hedge fund Farallon Capital Management just filed an amended 13G with the SEC regarding its position in Beacon Roofing Supply (BECN). Due to portfolio activity on December 31st, 2010, Farallon has disclosed a 3.5% ownership stake in BECN with 1,587,100 shares.

This signifies a slight reduction in their position size. At the end of the third quarter (September 30th, 2010), the hedge fund owned 1,869,032 shares. So over the past three months they've reduced their position by 15%.

Farallon was founded by Thomas Steyer in 1986 and today is a multi-billion dollar firm. They invest across the spectrum in equities, private investments, debt and real estate. Typically though, they focus on risk arbitrage. For an example of the types of investments Farallon makes, we examined their Alcon (ACL) play in a consensus hedge fund arbitrage trade.

Per Google Finance, Beacon Roofing Supply is "a distributor of residential and non-residential roofing materials in the United States and Canada. The Company also distributes complementary building materials, including siding, windows, specialty lumber products and waterproofing systems for residential and non-residential building exteriors."

Hedge Fund D.E. Shaw Shorts Barclays (BCS)

According to The Telegraph, hedge fund D.E. Shaw has taken nearly a £100m short position in Barclays (BCS). This short represents 0.26% of the company's shares outstanding and was disclosed to UK regulators via filing.

*Update: In a second filing, D.E. Shaw has disclosed that it has reduced its short position below the -0.25% threshold required for reporting. So while it's still entirely possible they are still short, the size of the position has been reduced.

Keep in mind that in the UK, institutions are still required to report short positions in financials that cross a particular size threshold. You can view our primer on tracking hedge fund positions in the UK for more information.

Regarding other portfolio movement at the hedge fund, we mentioned that D.E. Shaw boosted positions in Global Cash Access (GCA) and LodgeNet (LNET) back in December as well.

D.E. Shaw manages over $21 billion and was founded in 1988 by David E. Shaw. They focus on intertwining technology and finance as they are a hedge fund, private equity firm, and technology development shop all in one.

Taken from their website, they invest “in a wide range of companies and financial instruments within both the major industrialized nations and a number of emerging markets. Its activities range from the deployment of investment strategies based on either mathematical models or human expertise to the acquisition of existing companies and the financing or development of new ones.”

Per Google Finance, Barclays is "a global financial services provider engaged in retail banking, credit cards, corporate and investment banking and wealth management. It operates through branches, offices and subsidiaries in the United Kingdom and overseas. Barclays has two business groups: Global Retailing and Commercial Banking, and Investment Banking and Investment Management."

For research directly from the firm, head to D. E. Shaw's insight on leverage.

Louis Bacon's Moore Capital Reduces Mecom Position

Louis Bacon's global macro hedge fund firm Moore Capital Management recently disclosed an update to their position in Mecom (LON: MEC). Due to trading on January 7th, Moore has reduced its position to 3.55% of shares outstanding. This change was reported in a filing with UK regulators.

This is down from Moore's previous 4.45% stake in the publisher as Moore originally started a new position in MEC back in November of last year.

Per Google Finance, Mecom is "engaged in the operation of content and consumer businesses in Europe. The Company owns over 300 printed titles and over 200 Websites in its four divisions, with operations in the Netherlands, Denmark, Norway and Poland."

You can scroll through all our coverage of hedge fund positions in the UK here.

What We're Reading ~ 1/21/11

Comprehensive 2011 online brokerage review [tradeWISER]

Notes from John Griffin's class: Hedge fund analyst checklist [WorldBeta]

StockTwits interviews trader Charles Kirk [Howard Lindzon]

List of possible M&A targets [Footnoted/Morningstar]

Top 10 greatest trades of all-time [Barry Ritholtz]

Chicago value investor meet-up next week [SimoleonSense]

Family office vet talks about manager selection [FINalternatives]

Why he didn't setup as a hedge fund [Aleph Blog]

Short seller fights Chinese reverse merger frauds [Bloomberg]

Jeff Gundlach's DoubleLine bonds presentation (.pdf) [StoneStreetAdvisors]

Tread carefully in spun-off shares of Motorola Mobility (MMI)? [Peridot Capitalist]

How to become a great investor [GrahamInvestor]

Four further potential M&A targets [MarketWatch]

The 2011 investor roundtable [Barron's]

A look at investor Francis Chou [CanadianBusiness]

To make money, macro hedge funds must be nimble [Economist]

Google (GOOG) on the big mobile revolution [HarvardBusinessReview]

Why is Seeking Alpha paying its contributors? [Felix Salmon]

David Tepper Turns Cautious

It appears that Appaloosa Management founder David Tepper has turned cautious on the markets. In a recent interview with the NY Post, Tepper has interjected some common sense and says that "when things go up too high, they will go down."

The hedge fund manager seems to be advocating taking some profits and reducing risk, or at the very least, bracing for any potential impact. From the NY Post, "Tepper said while 'the biggest opportunities' will remain in equities, 2011 will be 'harder and not without risk.' "

If you read into his comments, he obviously still sees equities as the more favorable asset class, but he also hints that you'll have to be more selective with your picks (rather than simply smashing the 'buy' button on anything, a trade that has pretty much worked since September). If you're looking for picks from the hedge fund manager himself, Tepper recently bought Dean Foods (DF). And you can of course see the rest of Appaloosa's picks in our Hedge Fund Wisdom newsletter (new issue due out in a few weeks).

We are pointing this out because Tepper is scheduled to appear on CNBC tomorrow. And last time he appeared on the network, his bullish take on equities sent the stock market rallying furiously higher in what many have dubbed the 'Tepper rally' (it's is up over 13% since). Will he move markets again tomorrow? We'll have to wait and see what his extended comments are. But if this interview is any hint of what he'll have to say, those trading on his every word will be inclined to take some profits and be more selective with their holdings.

As we've highlighted on the site, market strategist Jeff Saut has also been cautious on the markets, but will be an eventual buyer of any sizable dip.

A Unified Theory of Investing: East Coast Asset Management's Year-End Letter

Today we present the fourth quarter letter from Christopher Begg and East Coast Asset Management. Readers will be familiar with East Coast from their insightful past commentary on consensus versus variant perception in the markets. Their 2010 year-end letter begins with a macro assessment but the meat of the letter focuses on developing a definable edge in investing.

Unified Theory of Investing

Begg says that the Unified Theory of Investing, like Newton's law of gravity, appears self evident once identified. He writes, "in the case of investing, it is both the complexity of the market place and the emotions associated with allocating financial resources that serve to obscure this law."

In short, East Coast proposes that the Unified Theory of Investing is Internal Rate of Return (IRR). The firm then offers the equation that JoC = IRR, where JoC stands for "Joys of Compounding." We previously detailed East Coast's letter on the joys of compounding. They are merely using IRR as a metric for comparing and contrasting investment options. What is the potential IRR of the investment?

To illustrate this, Begg presents a simple analogy: "Just like a shopper walking the aisles of a grocery store, the investor shops for opportunities by the IRR that is intrinsic to the potential investment at the price quoted."

It should come as no surprise that David Einhorn's hedge fund Greenlight Capital evaluates their investments on an IRR basis. As you'll note in Greenlight's year-end letter, there is a section of closed positions where the fund identifies their IRR on each previous investment.

Gaining an Investment Edge

Begg's letter then goes on to discuss a conversation he had with Seth Klarman of the Baupost Group. They focused on how successful investors and firms need to have a definable edge. East Coast identifies a three-pronged approach in their investing edge:

1. Process of Infinite Refinement - Passing through knowledge to arrive at simplicity

2. Perspective - The lens with which you see the world

3. Synthesis - Aggregating, sorting, and curating the right information which can then be viewed critically

These concepts are all discussed in-depth and we highly recommend reading East Coast Asset Management's fourth quarter letter in its entirety, embedded below:



You can download a .pdf copy here.

Yet another great piece from East Coast illustrating a framework for investing. More great market commentary can be found in David Einhorn and Greenlight Capital's year-end letter that we posted yesterday as well as Dan Arbess and Xerion fund's 2011 strategy.

David Einhorn Buys BP (BP)

David Einhorn recently penned his Greenlight Capital year-end letter. In it, we learn that the manager started a brand new position in BP (BP) during the fourth quarter. Greenlight's average purchase price was $41.18 per share.

Of his new stake, Einhorn writes,

"The Deepwater oil spill in April 2010 caused a significant decline in BP's share price. BP reserved nearly $40 billion pre-tax to account for costs related to this accident and has thus far sold $22 billion of non-core assets (with a stated target of up to $30 billion in divestitures), leaving the balance sheet in excellent shape. Pro forma for these asset sales and after taking into account our estimate of BP's eventual oil spill related expenses, we expect BP will be able to earn nearly $20 billion per year from continuing operations. At less than 7x pro forma earnings, we purchased BP at a 25% discount to its peers."

Einhorn also feels that the company will be able to re-instate its dividend this year. His hedge fund is already up on its position as BP shares trade just north of $48 per share currently.

His new position is intriguing for a few reasons. First, this is his second subsequent oil-related purchase in 2010. As we've detailed previously, Einhorn bought Ensco (ESV), an offshore contract drilling company whose shares sold-off during the oil spill despite ESV having no involvement in the actual spill. We penned a previous investment analysis on ESV in our Hedge Fund Wisdom newsletter (free sample issue with ESV analysis here).

If anything, ESV was hurt by the near-term oil drilling moratorium that was enacted. Shares of ESV have appreciated significantly since Einhorn's original purchase and it is now one of Greenlight's top 5 positions.

Second, this investment is intriguing due to its timing. Many would argue that the time to buy BP was during the actual oil spill itself, as shares spiraled from $59 down to $27.50. After all, "buying when there's blood in the streets" is often a value investor's mantra. We already know of one such value investor that dove in head first, as Whitney Tilson's T2 Partners bought BP during the spill.

It's most likely that Einhorn waited to make his investment due to the large uncertainty surrounding BP, its financial condition, and the potential liability associated with the oil spill. For further analysis of the oil company, be sure to check out T2 Partners' presentation on BP. And for more recent commentary from David Einhorn, head to Greenlight Capital's year-end letter.

David Einhorn & Greenlight Capital's 2010 Year-End Letter

David Einhorn's hedge fund firm Greenlight Capital has returned 21.5% annualized net of fees since inception in May 1996. For 2010, his various hedge funds returned 12.5%, 14%, and 15.9%. You can see how that compares to other managers in our 2010 hedge fund returns summary.

Einhorn was positioned defensively last year due to the uncertain economic environment and such positioning led to slightly under-performing the market indices.

New Stakes in BP (BP) and Sprint (S)

During the fourth quarter they started a new position in BP (BP) at an average price of $41.18.

Greenlight also started a new stake in Sprint Nextel (S) at an average price of $4.46. We wrote about Einhorn's Sprint position last month.

Top Five Positions (in alphabetical order)

- Arkema (France: AKE or on the pink sheets: ARKAY)
- Ensco (ESV)
- Gold
- Pfizer (PFE)
- Vodafone Group (VOD)

Embedded below is Greenlight Capital's year-end letter to investors:



You can download a .pdf copy here.