market folly

We recently got a glimpse of two positions from Jonathan Auerbach's hedge fund Hound Partners. His firm filed two Form 4's with the SEC in regards to shares of Rancher Energy (RNCHQ) and Network-1 Security Solutions (NSSI). Before we dive into the data specifics, we need to preface this by saying that these filings were made to convey the re-balancing of positions amongst their various investment partnerships (i.e. shifting the stake between Hound Partners LP, Hound Partners Offshore Fund LP, & Hound Partners, LLC). So, as far as we can tell, they weren't actively buying and selling. However, these disclosures did give us a glimpse at two positions that did not appear when we previously looked at Hound Partners' portfolio. Those of you who want the Cliffs notes of all this should walk away just knowing that Hound has revealed that they own positions in both of these companies.

We're not quite sure how long Auerbach's hedge fund has owned these names for two reasons. Firstly, both of these companies trade in over the counter markets so they might not be deemed as reportable securities for purposes of 13F filings (the form we use to track hedge fund portfolios). Secondly, Hound owns warrants in both of these companies which don't necessarily show up in 13F's either. So, for all we know they could have owned these two warrant positions for quite some time. There's just no way for us to tell, so we can't deem these "new" positions. That said, we'll just dish out the facts here and hang with us as there are a lot of moving parts.

As per the Form 4, they shifted shares of Rancher Energy (RNCHQ) between their investment vehicles. After all was said and done, Hound Partners LP owned 3,909,067 shares, Hound Partners Offshore owned 5,581,228 shares, and Hound Partners LLC owned 1,071,502 shares. They also disclosed warrant positions in RNCHQ, again re-balancing between their various entities. The warrants have a conversion price of $1.5, a date excercisable of December 22nd, 2006 and an expiration date of December 22nd, 2011. These are common stock warrants and Hound Partners owns 986,970 worth. Hound Partners Offshore owns 1,409,161 worth, and Hound Partners LLC now owns 270,535 worth. Rancher Energy of course filed for chapter 11 reorganization in late October last year.

Secondly, Auerbach's hedge fund firm basically did the same thing with their Network-1 Security Solutions Position (NSSI). After all the re-shuffling was completed, Hound Partners LP owned 812,985 shares, Hound Partners Offshore owned 1,160,753 shares, and Hound Partners LLC owned 222,845 shares. Auerbach's firm also shows a position in warrants with a conversion price of $2, an exercisable date of April 16th, 2007 and an expiration date of April 16th, 2012. Hound Partners LP in total owns 400,957, Hound Partners Offshore owns 572,472 worth, and Hound Partners LLC owns 109,905 worth. Whew, got all that?

As we mentioned earlier, the main takeaway here is that we now know Hound Partners owns positions in these two companies, information we previously did not have when we started tracking them. Hound is a New York based firm that Auerbach started with assistance from legendary hedgie Julian Robertson. He is one of the many 'Tiger Seeds' that Robertson has sprouted up in an attempt to crank out a new round of successful investment managers. Auerbach of course previously worked for Robertson's Tiger Management.

Taken from Google Finance, Rancher Energy is "is an energy company engaged in the development, production and marketing of oil and gas in North America. The Company operates three fields in the Powder River Basin, Wyoming, which is located in the Rocky Mountain region of the United States."

Network-1 Security Solutions "is engaged in acquisition, development, licensing and protection of its intellectual property. The Company owns six patents issued by the United States Patent Office that relate to various telecommunications and data networking technologies (the Patent Portfolio) and include, among other things, patents covering the control of power delivery over local area networks (LANs) for the purpose of remotely powering network devices over Ethernet (PoE) networks and systems and methods for the transmission of audio, video and data over LANS."

For more from Jonathan Auerbach's firm, you can view our coverage of Hound Partners portfolio.