market folly

The Skybridge Alternatives Conference, better known as the SALT Conference, is taking place in Las Vegas this week.  It's a multi-day affair with many speakers on a broad range of subjects.  We've condensed notes into primarily finance/investing thoughts from various hedge fund managers and investors below.


2016 SALT Conference Notes


Ken Griffin (Citadel):  Talked about how he built Citadel and the importance of culture at an organization.  'Avoid marrying a strategy' and instead focus on building a platform with the best people.  Business really taught him how to delegate and manage people.  On finding good talent: you've gotta be able to sell them on why they should leave and come to you.  You have to go out and find that talent instead of waiting for them to come to you.  The ones that 'knock on your door' aren't the best.  One interesting quote:  "Who is the number five manufacturer of personal computers?  Who cares?  We're in a more and more winner take all world."


Leon Cooperman (Omega Advisors):  He talked about a trend of investors moving from active to passive strategies and says that hedge fund performance can't really justify the fees these days, so fees need to come down.  He said that long-term (i.e. 'permanent') capital is doing good because they don't have to worry about lockups (citing Warren Buffett).  The other winner has been quant strategies.  Pitched the stock First Data (FDC) which recently IPO'd.  Says he's got around ~20% of his fund in structured credit at the moment.  Reiterated his belief that conditions for a recession are not present (a concept he's talked about for a while now).  Thinks the bubble is in fixed income.  Government bonds are a bad idea.  Likes Tetragon Financial, yields 7%, dividend coverage of 4x.  Buying a stock trading at half of book.


Kyle Bass (Hayman Capital):  Implied that investors need to lower their return expectations over the next few decades (5% global real return expectation).  Also agreed that fees for funds need to come down.  Says it's much harder to maintain investors than it is conviction.  Thinks we're in the early part of '07 in terms of credit/equity markets.  Says a hard landing in China is happening as we speak. Argues that China credit system is one of the biggest macro imbalances, something has to give sooner rather than later.  Hong Kong real estate is collapsing.


Roslyn Zhang (China Investment Corp):  Sovereign Wealth Fund.  Disappointed with hedge fund performance.  Compared Chinese retail investors to hedge fund herding.  Criticized those betting against the Chinese Yuan.  Argued that China's economy is still strong and that all of the building is due to the massive population; supply can be absorbed.


Sam Zell (Equity Group Investments):  Cost of regulation has gone up around 5x over the last decade.  Have been big investors in Brazil, Far East, Mexico. 


Ty Wallach (Paulson & Co):  Thinks specialty pharma stocks are oversold.  Specifically pointed out Valeant Pharmaceuticals (VRX) bonds.  Bought at 80cents on the dollar and says the co still has $10bn in equity value.  Could sell one of the many companies they've acquired if they need to cover debt payments.


Jeff Smith (Starboard Value): Activist investor.  Says settled with Yahoo (YHOO), put four new members on the board.  Notes the parts of the company are worth more than where its trading.  Core biz with $4bn in revenue, huge stake in Alibaba, Yahoo Japan, add it all up and it's more than the current market cap.  Said 'we're friendly but no one describes us as passive.'


Scott Ferguson (Sachem Head Capital):  Sold out of Zoetis (ZTS).  We noted how Pershing Square was also selling ZTS recently.  Ferguson was the one that brought the idea to Ackman to begin with (he used to work at Pershing).  Talked about how to change leadership and achieve things on behalf of investors: "Money's a great way to effectuate things" i.e. severance for getting rid of a CEO.  Says things are easier for activists these days and companies are more likely to engage. 


Clifton Robbins (Blue Harbour Group):  Activist investor.  Owns 10% of Investors Bancorp (ISBC), says it's trading at a discount to peers.  Also talked about Xilinx (XLNX), a net-cash semiconductor play; says they have some ideas as to how to utilize the balance sheet.


Michael Lewis (Author of Flash Boys and The Big Short):  Said he was surprised that both Moneyball and The Big Short were made into movies.  Said Christian Bale was dead-on with his interpretation of Michael Burry after just spending some hours with him.


Richard Chilton (Chilton Investments): Sherwin Williams (SHW): makes premium paint and coatings.  Says the company's purchase of Valspar was years in the making and they can repay the price with free cashflow in about 5 years.  Thinks there's a lot of synergies and margin overlap.  SHW does higher margins in paint/consumer and VAL does better margins in industrial coatings.  "You can't buy paint online."


John Lykouretzos (Hoplite Capital):  Takes a bit of an issue with the 'oligopoly' theme of airlines, saying it's still a competitive industry with margin pressure.  Bearish on the industry.  Main threats: excess capacity, union labor wage hikes, and of course higher oil prices.  Says that low cost carriers (LCC's) have basically destroyed the chance for legacy airlines to become a true oligopoly.  Thinks American Airlines (AAL) is the most compelling short play there.  Has some of the highest costs & exposure to rising oil.  High leverage.  Weakest FCF generation of the group.  Thinks that Southwest Airlines (LUV) can still add capacity even at higher oil prices (~$80 or so) and still generate high IRR.


John Burbank (Passport Capital):  Says China won't let outside companies 'win' especially Facebook.  "It's a hard place to win if you're not Chinese."  (While he didn't mention it, just look at Amazon's failed venture there as well).  Burbank owns Tencent (700.HK) with short Chinese Renminbi as partial hedge.  Thinks it isn't as much of a crowded trade as Facebook (FB) is.  His slide also said "Short FXI: Hedge out 'Old China' country-specific risk with China large cap ETF."


Jim Chanos (Kynikos Associates): Still short Cheniere Energy (LNG), calling it a 'pipe dream' and very expensive to peers.  Trades at 11-12x EV/EBITDA using "base case" 2021 EBITDA of $2.1bn.  Peers trading between 5-7x 2020 EBITDA.  Also commented on Alibaba (BABA) saying their accounting is dubious and that you don't really know what they're earning, calls it some of the most questionable he's ever seen. Chanos also recently talked about some of his short positions at the Sohn Conference.


For other recent hedge fund manager thoughts, head to our notes from Sohn Conference New York 2016.