Tuesday, November 24, 2015

Baupost Sees Opportunity In Volatile Markets

Baupost Group, the hedge fund managed by renowned value investor Seth Klarman, saw the value of its funds under management decline by a mid-single digit percentage during the nine months to the end of September, according to the fund’s third quarter letter to partners dated October 15th.

  • Also see – Baupost Is Said To Decline 3.8% In September On Energy, Biotech by Sabrina Willmer, Bloomberg
However, during the first five days of October the fund erased 75% of these YTD losses, and Seth Klarman expects the market to throw up more opportunities for value investors to take advantage of in the near future.
Baupost Group Seth Klarman
Baupost Group: Performance since inception

Baupost: No pressure to perform

In Baupost's third quarter letter, Seth Klarman comments on the prevailing market environment. Specifically, Klarman writes that many investors have been lured into the financial markets based on expectations of continued low volatility, a result of extreme policy measures by central banks around the world.
However, Baupost has remained wary and has not been "captivated by this monetary siren song". Unlike other hedge funds, which have piled into crowded trades under pressure to outperform their peer group on a short-term basis, Baupost has continued to invest with a long-term outlook.
What's more, the fund's cash balance (Klarman's favorite hedge against volatility) has remained high throughout the year, at more than 40% of the portfolio -- despite significant buying. Another 8% in cash is held in the liquidation of the cash-rich Lehman debtors.
Baupost continued to invest its capital in new opportunities throughout the third quarter, despite volatility. The fund deployed cash buying public equities, additional Lehman claims, and real estate. All of the investments acquired during the quarter were purchased at a significant discount to Baupost's calculation of underlying value and were attractive even under very conservative assumptions.
According to Baupost's 13F SEC filing the fund added nine new equity positions to its portfolio during the quarter, including PayPal Holdings Inc., Twenty-First Century Fox CL B, Olin Corp., Twenty-First Century Fox, AerCap Holdings N.V., LifeLock Inc., Sunrun Inc. and Orexigen Therapeutics Inc. Klarman’s largest buy during the quarter was Alcoa Inc., which is now Baupost’s third largest holding after Cheniere Energy Inc. and Viasat Inc.
‘Adds’ for the quarter were Cheniere Energy Inc., Pioneer Natural Resources, Antero Resources, Atara Biotherapeutics Inc., Veritiv Corp., ChipMOS TECH, Bellatrix Exploration Ltd., Biotie Therapies Corp. and Sanchez Energy Corp.
Throughout the third quarter, Baupost spent $2 billion buying public equities, $250 million acquiring undervalued debt instruments and $175 million was spent acquiring real estate. Partially offsetting this buying were almost $500 million of public securities sales, $550 million of mostly profitable real estate monetizations, and $170 million of Lehman distributions in the quarter.

Baupost: Volatility, opportunity ahead

Baupost exited the third quarter with plenty of dry powder on hand and Seth Klarman believes that there will be plenty of opportunities to deploy this capital going forward.
Indeed, Klarman speculates that the markets are entering an era of greater market volatility, where trading algorithms and investor skittishness drive more frequent and wider swings in the market. Moreover, a great many excesses have built up since the 2008 crisis, many investors, starved of opportunity have piled into the market, exhausting cash resources in the belief that easy money policies will continue to drive returns for the foreseeable future.
Going into the fourth quarter, Baupost is excited about the enhanced opportunity set on offer but is wary of plunging in head first. The fund remains cautious. It is doing some buying, averaging down while constantly checking and rechecking analysis, validating assumptions, and comparing new opportunities to what's already owned.

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Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.