Crisis and Deleveraging of Hedge Funds

Two must-read articles for the weekend:

Deleveraging of Hedge Funds over at Barron's

and

Observation on a Crisis over at Investor Insight

Worst Year for Hedge Funds in a Long Time

Well, that's stating the fairly obvious, now isn't it? But, here are the cold hard facts. Hedge funds who we all adored for their dominating performance figures over the past few years are now struggling to stay positive on the year. It's no longer a question of "How much will we dominate this year?" But, instead, "Can we scrape by?"

Case in point: We've already seen the closure of Ospraie's $3 billion commodities fund after it lost 40% this year, which I wrote about here. This just goes to show that even those who had learned from some of the best can be brought to their knees. Dwight Anderson, manager of Ospraie, had learned from both Julian Robertson and Paul Tudor Jones, legends in their respective strategies.

Next, we've got word that even more typically dominant funds are struggling now more than ever. Ken Griffin's Citadel has seen their Kensington fund down 15% for the year, as of a week ago. This multistrat fund hasn't had a losing year since 1994. All this comes at a time when I noted that Citadel is trying to start a $1 billion macro fund. And, I can't blame them. Although many macro funds have had a rough summer, they are still up on the year. And, I think you'll see that macro funds will be the longer term winners as we continue to see an evolving financial landscape.

Stevie Cohen's SAC Capital is also down 3.5% this year. Well, at least his multistrat fund is. This is his fund's worst year since 1992.

I recently wrote that Boone Pickens' BP Capital has lost nearly $1 billion so far this year. I also wrote about Harbinger Capital being up 42% at one point earlier this year, only to find themselves up only 2% for the year. Then there's TPG-Axon, who hasn't had a losing year since 2005. They're down 18% year-to-date as of last week.

I could go on and on, but you get the picture. Take all the performance figures I've divulged above and compare them to my hedge fund performance update written at the beginning of September.

Hedge funds are struggling, 401k investors are struggling, and the economy is struggling. The financial landscape is changing and look for numerous hedge fund redemptions and possible liquidations to sprout up in the coming months. There has already been a massive outflow of cash from the hedge fund space as investors become nervous. I expect this trend to continue, and so do the hedge funds. After all, why else would they have set aside an estimated $600 billion in cash accounts to cover these outflows?

It's beyond obvious at this point, but only the strongest will survive.

Peter Thiel's Clarium Capital Shifts to Equities

Recently, we got word of what Clarium Capital is doing to navigate the rough waters. Clarium is a $6 billion global macro hedge fund run by Peter Thiel, the co-founder of PayPal. Assets under management had recently ballooned to the highest amount in Clarium's history and I noted that it would be interesting to see how effective Clarium would be at deploying this new capital. And, with his most recent investor letter, we see that he actually was adding to his leverage, rather than decreasing it. In the week prior to September 19th, he was borrowing 40 cents for every dollar. This past week though, he was borrowing $1.40 for every dollar. Although Thiel undoubtedly changes his leverage on a daily/weekly basis, it is still worth pointing out, given the massive deleveraging we've seen over the past months and most likely will see in the coming months.

As I wrote about in my August performance update of Clarium, we had heard Thiel was shifting out of commodities. And, it looks as though that is exactly what he has done. We now see that he actually has short positions in commodities, to the tune of about 14% of assets. Also, in my analysis of Clarium's portfolio holdings, I noted that he only had a very small percentage of assets invested in equities at the time. But, this time around, he's beefed up his equity positions. Around 71% of his assets are now in equities. And, it looks as if he has been incrementally adding to equities, as he had invested 36% of assets in equities just the week prior. And, year-to-date, he is still up 27.8%. If you want a little more background on Thiel & his investment style, I first wrote about him here.

Also worth noting, according to Morningstar, hedge funds in general saw nearly $12 billion of outflows in July. And, given the recent market activity/volatility, you'd expect that number to have increased in August and/or September.


Source: Bloomberg

Housing Market & Unemployment Rate: Back to Reality

Fresh off of the Wall Street bailouts and short-selling bans, I'm here to remind everyone that while things slowly are being resolved on Wall Street, there is still a whole nother set of problems on Main Street. The unemployment rate is 6.1%. Not to mention, the economy lost 100,000 jobs in June, 60,000 in July, and 84,000 in August. We're now at eight consecutive months of job losses. And, we also have a housing market that seems far from bottoming, as evidenced by existing home sales falling 10.7% in August, and August new home sales falling to the lowest levels since 1982.

Case in point: Professor Robert Shiller believes the decline in housing prices could be worse than that of the Great Depression. Courtesy of Barry Ritholtz at The Big Picture, we see that Shiller sums up the situation with 3 main points:

• Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.

• There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).

• The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.

Then, also take into consideration the fact that the majority of any real 'demand' for housing currently could be artificial. Notable Calls mentions that the down payment assistance program is set to expire October 1st 2008. So, people may be in a hurry to buy a home to get that down payment assistance. But, after that expires, real estate veterans are saying that there is no other real demand outside of that program. So, the housing sales data coming up should be pretty positive. But, proceed with caution. We'll have to see if the demand was artificially swollen due to the assistance program expiring. If there really is no demand in the pipeline after October as those in the industry suggest, we could be in for a doozy. Just when people will have thought things are starting to improve, the demand could taper off yet again, as buyers continue to watch prices fall.


Sources: The Big Picture, Notable Calls, & Fixed Income Advisor

Zecco.com Offers Free Trades All of October!

Well, looks like Zecco.com continues to expand their reputation as the brokerage that offers free trades. Their latest promotion is free trades (both equity and options) for the entire month of October. Yep, that's right. Trade all you want for free in any account type. I'm a long time user of Zecco, and have to say I'm quite impressed with this. Traders can save a bunch of money on commissions with this promotion.

Here's the message from the CEO regarding the promotion,

"To show our appreciation for your loyalty, we have decided to make October a 100% unlimited free trading month. This means that between October 1st and October 31st you can make unlimited equity and options trades commission-free. As far as I know, this has never been done in the history of the brokerage industry, until now. But then again, we are seeing things in the market we never would have believed, until now."

And yes, for those of you without an account, this applies to new accounts as well. Taken from their FAQ,

"If I open a new account, can it get free trades too?

Yes, once your new account is funded, it will receive unlimited stock and options no-commission trades in the month of October."

So, sign up for an account now to get free trades. And, to those of you wondering what happens after the October promotion is over? Well, you still get 10 free trades a month thereafter, as long as you've got $2500 in your account. And, after you've used up your 10 free trades, its only $4.50 per trade after that, which is easily still one of the cheapest rates in the business. Zecco is really pushing hard to be the lowest-cost brokerage in the industry. It's tough to beat 10 free trades per month, not to mention free trades (equity and options) for ALL of October. I'm impressed.

Go get yourself 100% free trades for all of October, and then 10 free trades a month thereafter!

Full Disclosure: Zecco.com is an advertiser on this site, but they did not pay for this post. I am already a Zecco user and am making this post voluntarily to let readers know of this damn good deal.

Hedge Fund Tracking: Caxton Associates 13F Filing (Bruce Kovner)

(Note: Before reading this update, make sure you check out the preface to the series I'm doing on Hedge Fund 13F's here).

Time to continue the Hedge Fund tracking series! If you've missed them, I've already covered Jeffrey Gendell's Tontine Partners here, Bret Barakett's Tremblant Capital here, Peter Thiel's Clarium Capital here, Stephen Mandel's Lone Pine Capital here, Lee Ainslie's Maverick Capital here, John Griffin's Blue Ridge Capital here, Boone Pickens' BP Capital here, Louis Bacon's Moore Capital Management here, and Paul Tudor Jones' Tudor Investment Corp here. This week, I'm taking a slightly different approach to the hedge fund tracking series. I'm doing so because the 13F SEC filings are filed on a quarterly basis, so these materials are time sensitive and the next ones are due out in November. I stated in my series preface that you need to treat these as a lagging indicator, because that's what they are. The holdings discussed below reflect portfolio holdings as of June 30th, 2008. So, since these forms are so tedious to sort through, I've condensed the rest of the hedge funds I track to summarize their major moves and top holdings.

Additionally, the majority of the rest of the funds I follow are macro funds. And, since 13F filings only detail equity holdings, we're left with a bit of a problem. Macro funds typically employ strategies that encompass many financial markets. Be it commodities, currency, futures, foreign markets.... you name it. So, these funds are much harder to track. Since they are not required to disclose positions held in those markets, we only get to see their equity holdings. But, at the same time, I still find the information useful because many of these funds have numerous large equity positions which give you a broad sense as to what their strategies may be.

So, next in the macro hedge fund tracking series we have Caxton Associates, ran by Bruce Kovner. Taken from Wikipedia, Kovner's bio is as follows: "Kovner's first trade was for $3,000, borrowed against his MasterCard, in soybean futures contracts. Realizing growth to $40,000, he then watched the contract drop to $23,000 before selling. He later claimed that this first, nerve-racking trade taught him the importance of risk management. In his eventual role as a trader under the legendary Michael Marcus at Commodities Corporation (now part of Goldman Sachs), he purportedly made millions and gained widespread respect as an objective and sober trader. This ultimately led to the establishment of his current company, Caxton Associates, in 1983, which today manages over $10 billion in capital and has been closed to new investors since 1992." Year-to-date, Caxton Associates was up 5% as of a few weeks ago, as I wrote in my hedge fund year-to-date performance update.

If you want to hear some insightful thoughts from Bruce Kovner himself, head over to my post on Hedge Fund manager interviews. So, now that we've got a background on Kovner and Caxton Associates, let's take a quick look at his portfolio highlights. Keep in mind that this is merely a brief summary of Caxton's top holdings. Due to the time sensitive nature of the 13F material, I wanted to get this information posted before the next set of filings come out in November.

Top 20 Holdings by % of portfolio
1. Compania Cervecerias Unidas (CCU) - Increased position by 72934%, from 25,000 shares to 18,233,668 shares
2. Electronic Data Systems (EDS) - New Position
3. Activision (ATVI) - New Position
4. Monsanto (MON) - Increased position by 41 %
5. Rockwood Holdings (ROC) - Increased position by 68.8%
6. W-H Energy Services (WHQ) - Increased stake by 195%
7. Occidental (OXY) - Increased stake by 65%
8. ChoicePoint (CPS) - Decreased position by <>
9. DirecTV (DTV) - Decreased stake by 25%
10. W.R. Grace (GRA) - Boosted stake by 8%
11. Qualcomm (QCOM) - Boosted stake by 44.6%
12. Coca Cola (KO) - Decreased position by 12.5%
13. Rural Cellular (RCCC) - Increased stake by 12.4%
14. Research in Motion (RIMM) - Boosted stake by 8.7%
15. Service Corporation (SCI) - Increased position by 32%
16. Nucor (NUE) - Boosted position by 37%
17. (ANST) - New position
18. XTO (XTO) - Boosted stake by 150%
19. Stewart Enterprises (STEI) - Increased position by 12%
20. Gilead (GILD) - Decreased position by 26.7%

Kovner's Caxton Associates definitely disassociate themselves from the rest of the macro pack when it comes to the equity side of their portfolio. While their portfolio does hold typical energy and technology names often seen in other hedge fund portfolios, they also hold seemingly obscure names that I have yet to see pop up in any other funds I track. So, Kovner and his team may have discovered some diamonds in the rough here. In particular, I want to focus on his top holding: Compania Cervecerias Unidas (CCU). In the quarter prior to the filing, he held just 25,000 shares of this name. Then, over this past quarter, he ratcheted up his holdings in the name big time. He increased his position by 72,934%, bringing it all the way up to his firm's top holding, with a market value of over $642 million at the time of the filing. Needless to say, they bought this name with conviction. And, although I've seen numerous other funds buying up shares of Latin & South American beverage companies, this is the first fund I've seen pick up this name. So, definitely keep an eye on it.

Additionally, I want to point out his holdings in Rocwood Holdings (ROC), W-H Energy Services (WHQ), and Service Corporation (SCI). These are three other names I am seeing for the first time amongst the hedge funds I track. And, he was adding across the board to all three names. Caxton added to WHQ the most, increasing their position by 195%.

Now, turning to the 'hedge fund favorite' names that tend to pop up in numerous hedge fund portfolios that I track, we see Caxton holds positions in Qualcomm (QCOM), Research in Motion (RIMM), XTO Energy (XTO), Occidental (OXY), and Gilead (GILD). Caxton was out adding pretty moderately to all these names. OXY and XTO are easily two of the favorite equity energy plays amongst various hedge funds. And, you have to wonder how they affected their portfolio, given the volatile ride energy stocks have seen as of late. Turning to tech, we see that Caxton, like so many other funds, enjoy large positions in both QCOM and RIMM. As I've noted before, QCOM is easily a top five most common equity holding among the hedge funds I track. And, just like energy, technology stocks have been whipsawed around a lot recently. So, although Caxton was out adding this past quarter, we'll have to see if they were still adding to these names come the next 13F filing.

We already knew hedge funds (and macro funds in particular) had a rough July, as I noted here. And, it's easy to see why, with the heavy commodity exposure many of them had. What we don't yet know is how they've rebounded (if at all). Lastly, I just want to re-emphasize that since Caxton is a macro fund, they obviously have the majority of their positions in the commodity, currency, futures, or other markets. But, at the same time, they still have a sizable chunk of money in the equity markets.

Caxton Associates' full 13F filing listing every position can be found at the SEC.

Hedge Funds Reveal Short Positions (Blue Ridge Capital, Paulson & Co)

To comply with new UK regulations, hedge funds are being forced to disclose financial short positions. Two very well known hedge funds whom we've covered a lot here on Market Folly have already disclosed their positions. Firstly, Blue Ridge Capital is ran by John Griffin, a 'Tiger Cubs' (a.k.a. pupil of Julian Robertson while at Tiger Management). Griffin is well known because he was Julian Robertson's right hand man. So, needless to say, the dude knows his stuff. Blue Ridge seeks absolute returns by investing in companies who dominate their industries and shorting the companies who have fundamental problems. I've covered Blue Ridge's latest long positions here, but now we finally get to see some of what he's shorting. According to a disclosure made in the UK, Blue Ridge is short 0.95% of the shares of Alliance & Leicester PLC. Additionally, they have a short position in Anglo Irish Bank.

Another fund we're seeing some short positions from is John Paulson's Paulson & Co. Paulson is famous for the fortune he made by betting against subprime at the beginning of the crisis. And, now, it looks as if he's ready to turn his focus to some UK financials. Taken from StreetInsider, we get a solid breakdown of what Paulson is shorting: "Paulson & Co. yesterday disclosed short positions in four of the five largest British banks. The bet now makes Paulson the largest short seller of UK banks. According to the filing, Paulson's hedge fund has taken a $650 million bet against shares of Barclays (BCS), a $542 million bet against Royal Bank of Scotland (RBS), and a $483 million bet against Lloyds TSB (LYG)."

If you're interested in seeing how Paulson and various other hedge funds have performed year-to-date, check out my hedge fund performance update posts from July here and from September here.


Sources: WSJ, StreetInsider, & investEgate

Harbinger Capital Update (Performance & 13G Filing)

In a recent 13G filed with the SEC, $13.8 billion hedge fund Harbinger Capital, ran by Philip Falcone, has disclosed a 6% ownership stake in Ashland (ASH). They now own 3,789,266 shares. Curiously enough, in their last 13F filing disclosing their portfolio holdings as of June 30th, 2008, Harbinger held 5,871,426 shares of ASH. A 13G filing signifies a passive investment in a company. But, as we are all too familiar with Harbinger's activist exploits in the coal/steel arena, there's always the option they could shift this position from a passive investment, to an activist one (which would require a 13D filing).

Taken from Google Finance, Ashland Inc "is a global diversified chemical company that consists of four wholly owned divisions: Ashland Performance Materials, Ashland Distribution, Valvoline and Ashland Water Technologies."

Now, turning to Harbinger's recent performance, we see that they've had a pretty rough second half of the year. They were -12% for the month of September as of September 19th. This brings their year-to-date performance to 2%. So, the pain continues for Harbinger. I previously wrote about how many hedge funds were having a rough July. And, it looks like August and September were no different. The market has been a rollercoaster this year and I don't think anyone exemplifies this more than Harbinger. Earlier in the year, they were up as much as 42%. But, with a tumultuous turn of events, they now find themselves barely above break-even for the year. Don't get me wrong, they are still outperforming the indexes; but, it is by a much slimmer margin than it was just a few months prior. How's that for volatility?

In his letter to investors, Falcone had assured investors that they are adequately positioned to stave off any further volatility the markets may bring their way, noting that the firm had reduced exposure to some of their higher volatility holdings (both on the long and short side). Additionally, Falcone mentioned that they were not employing leverage anymore; at least as of August. His portfolio had been 52% long and 48% short. Some of Harbinger's largest positions include Calpine (CPN), Freeport McMoran (FCX), and Cleveland Cliffs (CLF). All three have seen massive sell-offs as of late, which would easily explain Harbinger's poor recent performance.

If you missed my earlier post, I've covered Harbinger's recent SEC filings here. Additionally, if you want to know about the man behind Harbinger Capital, you can read about Philip Falcone here.

Source: BBerg

Boone Pickens' BP Capital Funds Down Big

If you are unfamiliar with T. Boone Pickens, he is an energy maverick and his fund returned 300% in 2005. He is a big advocate of Peak Oil Theory and runs an energy-centric hedge fund (BP Capital) based in Dallas, Texas. His energy stock fund has a compounded annual return of 37% over seven years. Although he typically holds numerous positions in oil, he is also big on alternative energy (except ethanol) and has numerous holdings there as well. He most recently advocated a large natural gas position and has additionally made a big bet on wind energy. Some of his thoughts can be seen here from one of my posts. And, if you live under a rock, he's pushing for energy independence with his Pickens Plan.

But, it seems as if the maverick himself has had a rough last few months. We already knew that BP Capital had a rough July, where he was down almost 35%. And, it gets even worse. His hedge fund that focuses on energy stocks is down 30% through August. Additionally, his commodity fund is down 84% and is a poster child of leverage gone bad. (His commodity fund relies heavily on leverage, hence the larger losses). Ouch. All things considered, he has lost around $1 billion this year, $270 million of which is his own money.

Pickens said,

"It's my toughest run in 10 years.... We missed the turn in the market, there's nothing fun about it. I'm not willing to accept that [the downturn] was due to a global slowdown. When there's deleveraging in markets it will affect everything."

Additionally, he thinks oil prices will climb again due to oil demand outpacing supply and will maintain this view until he sees evidence of a true global slowdown. But, in a cautious move, he has shifted his portfolios to a more neutral stance. Curious as to what BP Capital had in their portfolio that was causing them so much pain? Well, then check out my analysis of their most recent portfolio holdings, found in their latest 13f filing. We'll have to see if ole Boone can turn his ship around in the next few months.

Source: WSJ

Hedge Fund Tremblant Capital Group Discloses 9% Stake in PharmaNet Development Group (PDGI) in 13G Filing

In a 13G filing with the SEC, Tremblant Capital Group on Tuesday disclosed they own 1,758,311 shares of PDGI - PharmaNet Development Group, (formerly SFBC International). This represents a 9.0% ownership stake in the company. A 13G filing indicates passive ownership. This is a brand new position, as it was nowhere to be found in their most recent 13F filing where they disclosed their complete equity portfolio holdings as of June 30th, 2008. And, if you missed it, you can check out the rest of Tremblant's holdings from that most recent 13F which I analyzed in full here.

Tremblant Capital Group is managed by Bret Barakett. If his last name sounds familiar, its because his brother, Timothy Barakett, manages fellow macro fund Atticus Capital, whom I also track. Taken from their site, Tremblant Capital Group's objective is "to achieve superior risk adjust returns for our investors through our focused and disciplined investment process." Tremblant is a $4.1 billion hedge fund based in New York and is run by Bret Barakett, who is a former portfolio manager at Moore Capital Management (the hedge fund run by the great Louis Bacon, whom I've also tracked here). So, as you can see, despite having a great mind of his own, Barakett has worked with some of the best in the macro game. And, that's why he's worth tracking. But, this year has proven difficult for Bret Barakett (and many other fund managers for that matter). As I noted in one of my hedge fund performance updates, Tremblant was down 8.96% as of the beginning of August.

Taken from Google Finance, PharmaNet Development Group Inc. (PDGI), formerly SFBC International, Inc., "is a global drug development services company providing clinical development services, including consulting, Phase I and bioequivalency clinical studies, and Phase II, III and IV clinical development programs to pharmaceutical, biotechnology, generic drug and medical device companies around the world. The Company conducts its operations in two segments: early stage and late stage clinical development."

You can view the 13G filing at the SEC.

Hedge Fund Tracking: Tudor Investment Corp's 13F Filing (Paul Tudor Jones)

(Note: Before reading this update, make sure you check out the preface to the series I'm doing on Hedge Fund 13F's here).

Time to continue the Hedge Fund tracking series! If you've missed them, I've already covered Jeffrey Gendell's Tontine Partners here, Bret Barakett's Tremblant Capital here, Peter Thiel's Clarium Capital here, Stephen Mandel's Lone Pine Capital here, Lee Ainslie's Maverick Capital here, John Griffin's Blue Ridge Capital here, Boone Pickens' BP Capital here, and Louis Bacon's Moore Capital Management here.

This week, I'm taking a slightly different approach to the hedge fund tracking series. I'm doing so because the 13F SEC filings are filed on a quarterly basis, so these materials are time sensitive and the next ones are due out in November. I stated in my series preface that you need to treat these as a lagging indicator, because that's what they are. The holdings discussed below reflect portfolio holdings as of June 30th, 2008. So, since these forms are so tedious to sort through, I've condensed the rest of the hedge funds I track to summarize their major moves and top holdings.

Additionally, the majority of the rest of the funds I follow are macro funds. And, since 13F filings only detail equity holdings, we're left with a bit of a problem. Macro funds typically employ strategies that encompass many financial markets. Be it commodities, currency, futures, foreign markets.... you name it. So, these funds are much harder to track. Since they are not required to disclose positions held in those markets, we only get to see their equity holdings. But, at the same time, I still find the information useful because many of these funds have numerous large equity positions which give you a broad sense as to what their strategies may be.

So, next up in the macro hedge fund tracking series we have Tudor Investment Corp, the brainchild of Paul Tudor Jones. Taken from Wikipedia, the bio of PTJ is as follows: "In 1980 he founded Tudor Investment Corporation which is today a leading asset management firm headquartered in Greenwich, Connecticut. The Tudor Group, which consists of Tudor Investment Corporation and its affiliates, is involved in active trading, investing and research in the global equity, venture capital, debt, currency and commodity markets. One of Jones' earliest and major successes was predicting Black Monday in 1987, tripling his money during the event due to large short positions. Jones uses a global macro strategy when trading in some of his funds. This strategy can be seen in the 1987 PBS film "TRADER: The Documentary". The film shows Mr. Jones as a young man predicting the 1987 crash. Jones' firm currently manages$17.7 billion (as of June 1, 2007). Their investment capabilities are broad and diverse, including global macro trading, fundamental equity investing in the U.S. and Europe, emerging markets, venture capital, commodities, event driven strategies and technical trading systems." So, as you can see, PTJ is quite an accomplished gentleman, earning him the title of THE macro trader.

(If you want to hear some insightful thoughts from Paul Tudor Jones himself, head over to my post on Hedge Fund manager interviews. Also, you can check out some additional thoughts from Paul here.)

So, now that we've got a background on Jones and Tudor Investment Corp, let's take a quick look at his portfolio highlights. Keep in mind that this is merely a brief summary of Tudor's top holdings. Due to the time sensitive nature of the 13F material, I wanted to get this information posted before the next set of filings come out in November.

Top 20 Holdings by % of portfolio
1. Plains Exploration and Production (PXP) - Added to his position by $160 million
2. Anadarko Petroleum (APC) - Nearly doubled his stake
3. Mirant (MIR) - Increased position by 21%
4. Elan (ELN) - Decreased position by 22%
5. SPDR Trust (SPY) - New position
6. Entergy (ETR) - New position
7. Occidental Petroleum (OXY) - New position
8. NRG Energy (NRG) - Added to his position very slightly
9. Alcoa (AA) - Increased stake by nearly 33%
10. Mastercard (MA) - Increased stake by 12%
11. Wellpoint (WLP) - New position
12. Williams Companies (WMB) - Decreased position by 34%
13. Qualcomm (QCOM) - Decreased position by 30%
14. DirecTV (DTV) - Literally added only 3 more shares
15. Marvell Technology (MRVL) - Increased stake by 3.6%
16. Allegheny Energy (AYE) - Decreased stake by 26%
17. Fidelity Information Services (FIS) - Increased position by 76%
18. Verisign (VRSN) - Increased stake by 49%
19. CSX Corp (CSX) - Decreased stake by 18.6%
20. Heinz (HNZ) - Decreased position by 20.7%

At the time of the filing, Tudor Investment Corp's total equity portfolio totalled around $5.7 billion. So, I just want to re-emphasize that since they are a macro fund, they obviously have additional positions in the commodity, currency, futures, or other markets. But, at the same time, they still have a sizable chunk of money in the equity markets.

Paul Tudor Jones was out adding brand new positions to his portfolio in a big way. He established new positions in: The Spiders (SPY), Entergy (ETR), Occidental (OXY), and Wellpoint (WLP). Not only did he start new positions in these names, but he brought them all up to top 10 holdings within one quarter. I want to highlight his stakes in Entergy and Occidental, as they are both energy related. I'm slowly but surely starting to see ETR pop up in numerous hedge fund portfolios, so it's definitely worth keeping any eye on. These funds could be establishing this as one of their ways to play the nuclear energy space, as the alternative energy train picks up steam. We'll see if he adds to this position in the next round of 13F filings. At the time of filing, his stake in ETR was worth a bit over $201 million. Secondly, Occidental (OXY) is another 'hedge fund favorite' energy play. This integrated energy producer has definitely been firing on all cylinders fundamentally. But, with the recent volatility in the commodities markets, one would have to assume that PTJ has felt some pain with this position. He had this position as of June 30th (the time of the filing), and around then OXY was trading around $87.50. In the coming months, OXY would drop to as low as $65, before rebounding to current levels of around $80. So, we'll wait and see next time if he bailed ship or if he stuck with this name. At the time of filing, his position in OXY was worth $181 million. If I were to bet, I would say that he did not add to this position, because one of his rules is never to average down on a loser.

Interesting to see that Paul Tudor Jones decreased his position in Qualcomm (QCOM) by 30%. QCOM is by far one of the most common names in hedge fund portfolios these days. So, whether he was taking profits or saw something he fundamentally disliked remains to be seen. We'll have to monitor this next quarter to see if he continues to sell down his position. It's always interesting to see how various funds handle a position they have in common with numerous other well-respected funds. Tudor's decision to sell off 30% comes while fellow global macro manager and friend Louis Bacon was adding to his QCOM position, as I wrote about in Moore Capital Management's 13F analysis.

I also want to point out his decision to add to his Verisign (VRSN) position. He upped his stake by nearly 50%, bringing it up to his 18th largest position. I haven't seen this name pop up in too many funds' portfolios, so I was intrigued to see him beef up his stake pretty substantially.

Lastly, just wanted to point out that, like his colleague Bacon, Tudor had pretty significant exposure to natural gas. In fact, Tudor's top 2 positions were both natural gas plays: PXP and APC. So, those positions undoubtedly forced him to make some decisions as they tanked over the past few months. It will be interesting to see how this potentially affected him, because his fund was up 3% year to date as of just a few weeks ago, as I wrote about in my hedge funds year-to-date performance update.

So, while last quarter's glimpse inside Tudor's portfolio is interesting, it will be much more interesting to see what they've done with these holdings come November. We already knew hedge funds (and macro funds in particular) had a rough July, as I noted here. And, it's easy to see why, with the heavy commodity exposure many of them had. But, as of a few weeks ago, Tudor was still up on the year, in a year when many funds are seeing red from all the whipsawing.

Tudor Investment Corp's full 13F filing listing every position can be found at the SEC.

Potash (POT) Poised to Benefit Should Hedge Fund Worries Subside

If you want to understand why Potash (POT) has been such a solid performer over the past year or so, all you have to do is look at simple supply and demand. And, Potash (POT) has done just that in their Market Analysis Report released on August 29th, 2008. They've assembled a slideshow of charts that illustrate the very pricing power they are seeing in their industry. Demand is rising and supply is falling. This industry is easily one of the strongest groups fundamentally right now because of secular trends. But, due to hedge fund redemptions/liquidations and the commodity sell-off, this name has been inexplicably sold off along with any and all energy or commodity related names. In a market where logic and fundamentals have been thrown out the window, it may be best to stand aside and let the chaos pass. But, when/if/should normalcy return to the financial markets, POT is poised to benefit simply because they actually have a strong fundamental story behind them.

Such strong fundamentals have been illustrated with charts extracted from Potash's latest Market Analysis Report:

Firstly, we see Global Grain production and fertilizer use increasing.

(click to enlarge)

Secondly, we see worldwide fertilizer demand growth: "Recognizing that without sufficient potash they cannot raise their yields – no matter how much N and P they apply – farmers have raised their potash consumption an average 5.6% per year for the past five years. This compares to 2.7% for N fertilizer and 3.8% for P. Over the past five-year period cumulative world fertilizer growth has been greater than adding a market the size of the US or India, the second and third largest fertilizer markets."

(click to enlarge)

Thirdly, we see that potash ending inventory has decreased each year for the past 3 years.

(click to enlarge)

Additionally, commentary from their Market Report reads,

"Potash is used on a diverse group of agricultural commodities. Wheat, rice, corn, soybeans and sugar cane consume roughly 50% of the world’s potash. This diversity means that global potash demand is not highly dependent on the market fundamentals for any single crop or growing region. US use of corn for ethanol has grown in recent years but this segment of market accounts for only 2% of world potash consumption. The global potash industry is operating at historically high rates to meet the significant growth in potash demand. With the industry running at or near full capability, world production in 2008 is expected to be limited to an increase of only 2.0-2.5%. This (production) is well below the 5.6% demand growth rate of the past 5 years."

So, simply put, fertilizer demand is outpacing supply.

In addition to the supply/demand equation tilting in Potash's favor, they are also seeing more favorable input costs. Natural Gas is one of the main agricultural input costs. And, as you've witnessed this summer, prices of natural gas have fallen hard 40%. So, this can only further POT's bottom line. And, if for some reason you still need further reassurance that the agriculture boom is still in play, just turn to analyst comments from Morgan Stanley. They say that the selloff in these names is "unfounded" and that they expect peak earnings around 2011. They rate Potash (POT) "Overweight" with a $297 price target (POT is trading around $180 now).

Additionally, as NotableCalls mentions (re: Morgan Stanley analyst comments),

"Fertilizer prices will stay higher for longer: i) A global economic slowdown is unlikely to affect fertilizer demand; ii) US farmers are still earning a ~60% ROIC on fertilizer purchases and are thus unlikely to reduce fertilizer application; iii) Emerging market farmers are very low on the yield response curve (i.e., increased application pays for itself); iv) NPK prices have yet to catch up to commodity prices (i.e., record US farmer profits despite higher NPK prices); and v) They believe capacity increases will simply meet underlying demand rather than flood the market and force lower prices. Valuation extremely compelling: 2009e EV/EBITDA of 2-5x; FCF yields of 10% to 20%. Minimal balance sheet leverage (in some cases none) should allow for substantial share repurchases and dividend payments. POT has the most leverage to potash, the nutrient with the greatest pricing power and barriers to entry."

So, the real dilemma here is trying to decide whether to enter POT at these levels given the market uncertainty. Hedge funds closing their doors like the Ospraie Fund are forced to sell their positions. And, if they are heavily invested in fertilizer/energy/commodity names (as many of them are), you can guess what that means for the stocks. Given the fact that we have seen numerous commodities and macro hedge funds negatively affected by the commodities sell-off, one would have to think that further hedge fund redemptions or liquidations are in store, as I wrote about here. Additionally, Nouriel Roubini seems to think the next step of the crisis will be the de-leveraging of hedge funds. But, it would still be hard to envision a commodities selloff as great in magnitude as the one we recently saw, given the already vast depreciation in equity prices.

Trading at just an 8.37 forward PE, POT is very compelling here. The bulk of the gains come from solid operating margins of 41.29% and return on equity of 37%. They are seeing year over year quarterly revenue growth of 102.30% and year over year quarterly earnings growth of 216.80%, both massive figures to say the least. The only major negatives would be their $2.27 billion in debt, compared to $269 million in cash. But, one could easily argue that since POT is essentially printing cash with their business, that their debt is not worrisome at all. In the end, their debt/equity ratio comes in at around 0.34. Lastly, we see that around 77% of shares are held by institutions. And, among those institutions are numerous hedge funds we track here at Market Folly. Firstly, $10 billion global macro hedge fund Moore Capital Management (ran by Louis Bacon) owns POT, as we noted in our recent hedge fund tracking piece. Additionally, POT is owned by $10 billion Maverick Capital (ran by Lee Ainslie), whose portfolio holdings we analyzed here. And, last, but not least, we also noted that George Soros had been purchasing Potash (POT). Now, I don't believe these funds are in jeopardy of massive hedge fund redemptions/liquidations as I referenced earlier. But, at the same time, anything can happen these days and there are undoubtedly numerous highly leveraged funds out there waiting to explode/de-leverage.

So, we really are at a crossroads here. On one hand, the fundamentals are screaming "buy," as the supply and demand picture only gets further squeezed, since new potash cannot be brought online for years. But, at the same time, you run the inherent risk of POT being sold off ridiculously hard again should a bunch of hedge funds face redemptions or liquidations as many are forecasting. So, the inherent risk here is not company specific, nor sector specific, but rather financial market specific. The fundamentals are in-tact and that's all that matters. But, with some hedge funds teetering on edge, things can swing either way. Value investors and deep fundamentalists will tell you that even if you have to go down through a valley before getting to the mountain top, it's still worth going through for the opportunity. But, given the recent market volatility and unpredictability, exercising some caution can never be a bad thing. If the saying holds true that fundamentals trump all, then buying POT now could payoff large come 2010 and 2011. This must be what it feels like to be a value investor, huh?

Sources: NotableCalls & Potash Market Analysis Report

Nouriel Roubini Thinks Run on Hedge Funds is Next Step

Nouriel Roubini this weekend talked about the next step of the crisis:

"The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years."

Source: FT

Eric Bolling's Latest Thoughts

I know a lot of people out there are fans of Eric Bolling. Hell, I'll admit that I was/am too. After all, he was the only reason I used to watch CNBC's Fast Money. In any event, I like to check in to see what he's up to and what his market commentary is whenever I can.

His positions at the time of writing his latest articles were: Goldman Sachs (GS), Chesapeake (CHK), dollar index, Gold, Toll Brothers (TOL), Hovnanian (HOV), CME (CME), Exxon Mobil (XOM), Devon (DVN), and Chevron (CVX). And, he said he is also waiting patiently for an entry to Natural Gas futures. I, on the other hand, apparently was not so patient (seeing how my limit order triggered and I bought UNG last week on the test of support, which I illustrated here). So, with that in mind, I figured I'd link up his most recent piece over at TheStreet.com here. Oh, and if you've got no idea who I'm talking about, read about Eric Bolling here.

Hedge Fund Industry: Linkfest

Here are a few articles detailing activity swirling around the Hedge Fund Industry at the moment.

A Dark Mood Among Hedge Funds in London [NYTimes]

SEC May Require Hedge Funds to Reveal Short Positions [Bloomberg]

Regulators Try to Change Rules to Match the Need [NYTimes]

Hedge Funds May Fund New Disclosure Rules Unpalatable [NYTimes Dealbook]

Hedge Fund Equity Exposure (Long/Short) [The Big Picture]