Top 10 Biggest Hedge Funds in 2010

AbsoluteReturn+Alpha is out with its 2010 year-end survey of the top ten hedge funds in the Americas. Their findings show that American hedge funds manage a combined $1.297 trillion, up 10% from the year prior. However, this still falls short of the 2008 peak level of $1.675 trillion before the financial crisis.

The Top Ten Hedge Funds in the Americas

1. Bridgewater Associates: $58.9bn AUM
2. JPMorgan Asset Management: $45.5bn
3. Paulson & Co: $36bn
4. Soros Fund Management: $27.9bn
5. Och-Ziff Capital Management: $27.6bn
6. BlackRock: $26.6bn
7. Baupost Group: $23.4bn
8. Angelo, Gordon & Co: $22bn
9. Farallon Capital Management: $21.5bn
10. King Street Capital Management: $19.9bn


Possibly the most astonishing fact here is that in 2010 the big... got even bigger. Ray Dalio's Bridgewater Associates increased its AUM by $15.3 billion. Dalio gave a rare interview yesterday that's definitely worth listening to. His Pure Alpha Fund II gained 44.8% last year, quite the performance when you compare it to other 2010 hedge fund returns.

Of the hedge funds featured on the list, we provide updates on the portfolio activity of four of them:

- Seth Klarman's Baupost Group has been active in commercial real estate and we just posted up an excerpt from his year-end investor letter.

- Paulson & Co has been focusing on restructured equities as noted in their year-end letter.

- Farallon Capital focuses on risk arbitrage and their investments have been featured in our newsletter.

- You can also view the latest portfolio activity from Soros Fund Management here.

Bridgewater's Ray Dalio: Rare Interview

Ray Dalio of $58.9 billion hedge fund Bridgewater Associates gave a rare television interview yesterday on CNBC so we wanted to feature his comments on a myriad of topics. His Pure Alpha II fund returned 44.8% last year and is the largest hedge fund firm in America.

On the topic of US equities, Dalio said that they, "first are still comparatively cheap. But more importantly, the flows are beneficial to them because US equities benefit from currency depreciations. I think, as I say in 2012, the developed countries' currencies will devalue in relationship to the emerging countries' currencies."

So, it appears as though Dalio sees equities benefiting, at least in the near-term. The last time we saw Dalio's elongated comments on markets back in February 2009, he was claiming it would soon be the "buying opportunity of the century" and he was right.

His thoughts on weakening currencies are intriguing given that he also thinks gold is under-appreciated here. This is largely the thesis John Paulson's gold fund is predicated upon, so they share this viewpoint. Dalio thinks gold should garner at least a portion of your portfolio, at the very least for diversification and risk reduction purposes.

Dalio also had a good quote on the topic of thinking for yourself, saying, "in order to make money in the market you have to be an independent thinker. And I think also creative, you have to be willing to make mistakes. And so the process is that anybody in the company, if anything doesn't make sense to them, that they can bring up what doesn't make sense to them in a non-hierarchical way and look at whether it's true or not and what we should do about it. We particularly like looking at mistakes or weaknesses that we have in order to get stronger."

He raises a good point and many prudent investors have honed in on learning from mistakes over the years.


Embedded below is Dalio's interview (email readers will need to come to the site to view):



For thoughts from more great hedge fund investors, today we've also posted up an excerpt from Seth Klarman's 2010 year-end letter.

Seth Klarman & Baupost Group's 2010 Letter Excerpt

Thanks for MyInvestingNotebook for highlighting that legendary investor Seth Klarman and his firm, Baupost Group, are out with their 2010 year-end letter. Courtesy of VII, below is an excerpt from their letter. We're going to warn you that it is very long, but a must-read:

*removed per the request of representatives from Baupost*


For more from this value investing guru, see Klarman's lessons from the financial crisis as well as some of his recent activity in commercial real estate.

To read additional insight from top hedge fund managers/investors, we've posted up a ton of great investor letters including:

- John Paulson
- Lee Ainslie's Maverick Capital
- Third Point's Dan Loeb
- Perry Capital
- Barry Rosenstein's JANA Partners
- Warren Buffett's annual letter

What We're Reading ~ 3/4/11

Latest letter from Paul Tudor Jones [Dealbreaker]

Transcript of David Einhorn's FCIC interview [Santangel's Review]

The StockTwits blog network is up and running [StockTwits]

On the critical task of risk management [GregSpeicher]

Rumor: Hedgie makes big Ocado loss? [CityAM]

Falcone allows direct investment in LightSquared [Reuters]

Taconic Capital takes $250m stake in BSkyB [Reuters]

Court rejects hedge fund's challenge to 13F disclosure [FoleyHoag]

iPad2 vs Xoom vs HP TouchPad vs BlackBerry PlayBook: A comparison [Engadget]

ValueAct Capital Sells Gartner (IT) & KAR Auction Services (KAR) Shares

Jeffrey Ubben's activist hedge fund ValueAct Capital recently sold shares in two positions: Gartner (IT) and KAR Auction Services (KAR). ValueAct manages $5 billion and has earned a net annualized return of 13.5% over the last ten years.


Gartner (IT)

First, ValueAct sold 9,700,000 shares of Gartner (IT) at $34.44 per share. After this transaction, they still own 7,090,513 shares. This marks almost a 58% reduction in their position size (shares currently trade around $37.36).

At the end of 2010, IT was their third largest position behind only Valeant Pharmaceuticals (VRX) and Sara Lee (SLE). But now with the sale, the position sits in the middle of their portfolio. This is the second time in six months they've sold shares of IT as they previously reduced their position in September.

KAR Auction Services (KAR)

Second, Ubben's hedge fund sold 1,350,000 shares of KAR Auction Services (KAR) with the bulk of the sale coming at $14.21 per share. After their sales, ValueAct was left with 908,828 shares. All told, it looks like they sold almost 60% of their position. The stock currently trades around $14.25.

ValueAct typically focuses on undervalued companies in the healthcare, technology, and information services sectors.

Companies' Background

Per Google Finance, Gartner is "an information technology (IT) research and advisory company. The Company is a partner to 60,000 clients in 10,000 distinct organizations in over 80 countries. The Company’s principal products and services are delivered through its Research, Consulting and Events segments."

KAR Auction Services is "a holding company. The Company is a provider of vehicle auction services in North America. It facilitates auction services for sellers of used, or whole car, vehicles and salvage vehicles, through its 214 physical auction locations and Internet venues."

Mark Rachesky's MHR Fund Management Goes Activist on Seahawk Drilling (HAWK)

Mark Rachesky's MHR Fund Management has filed an activist 13D with the SEC regarding shares of Seahawk Drilling (HAWKQ). The filing, reflecting portfolio activity on February 16th, indicates MHR has disclosed a 9.8% ownership stake in HAWKQ with 1,173,513 shares. This is not a new position as MHR held the same amount of shares at 2010 year-end.

HAWKQ Selling Assets to Hercules Offshore (HERO)

Rachesky's firm seems to take issue with the debtors of HAWKQ who have fast-tracked a proposed sale transaction with Hercules Offshore (HERO). The proposed sale would result in the debtors receiving $25 million in cash and 22.3 million shares of Hercules common stock in exchange for the sale of substantially all of its assets.

Going Activist: Formation of Equity Committee

MHR has filed in conjunction with Andalusian Capital Partners, FISBC Global Asset Management, and Mercer Park. We'd also point out that Kyle Bass' Hayman Capital disclosed a 8.4% stake in HAWK in a separate and unrelated filing.

Per various exhibits filed with MHR's 13D, we see that they've been granted appointment of an equity committee to secure independent representation for public shareholders "at this crucial stage of these Chapter 11 proceedings, while the Debtors are attempting to fast-track a DIP motion and prearranged sale that equity has not had adequate time to review."

Fund Manager Background

So, we'll have to see what Rachesky has up his sleeve in this regard since his committee formation was granted. Rachesky, prior to founding MHR was a senior investment officer and managing director for Carl Icahn. Needless to say, he's got plenty of experience in the activist realm.

Rachesky earned his B.S. in molecular aspects of cancer from the University of Pennsylvania and an M.D. from Stanford University School of Medicine. Additionally, he earned an MBA from the Stanford Graduate School of Business; the man is a degree-earning machine.

Per Google Finance, Seahawk Drilling was spun-off from Pride International and "operates a jackup rig business that provides contract drilling services to the oil and natural gas exploration and production industry in the Gulf of Mexico."

Be sure to stay up to date with the latest hedge fund filings with our free daily site updates via email or also via RSS reader.

Soros Fund Management Starts Adira Energy (ADENF) Position

George Soros' firm, Soros Fund Management, has filed a 13G with the SEC regarding shares of Adira Energy (ADENF). Per portfolio activity on February 16th, Soros has disclosed a 10.42% ownership stake in ADENF with 10,483,871 shares.

This is a brand new position for the hedge fund and is a result of a non-brokered private placement. Soros acquired shares at $0.62 per share in its Quantum Partners LP investment vehicle. Shares now trade at $0.88. The company also recently announced management changes, inserting Yael Reznik Cramer as interim CEO.

We've detailed other recent portfolio activity from Soros including an addition to their Harvest Natural Resources (HNR) stake, as well as starting a stake in San Leon Energy. For a complete look at Soros' portfolio, head to the newly released issue of Hedge Fund Wisdom.

Per Google Finance, Adira Energy "formerly AMG Oil Ltd., is an early-stage oil and gas exploration company. The wholly owned subsidiaries of the Company include Adira Energy Holdings Corp., Adira Israel Ltd and Adira Energy Services Ltd."

Baupost Group Provides $300 Million in Commercial Real Estate Project

According to the Atlanta Business Chronicle, Seth Klarman's Baupost Group will provide $300 million in equity to restart the "Streets of Buckhead" commercial real estate project in Atlanta, Georgia. Oliver McMillian Inc has purchased the luxury project and plans to start building this year.

We're highlighting this news because it ties directly into what Klarman said last year: he's finding opportunity in commercial real estate. The caveat with that statement, of course, is that he's been focused on private real estate.

In a time when Baupost sees less opportunity in the markets and has even returned some investor capital, this is an example of where Klarman is putting money to work. It's not very often you hear updates on what Baupost is doing, so we wanted to highlight it for those interested. For more from this great investor, check out Seth Klarman's recommended reading list.

Dan Loeb's Third Point Buys El Paso (EP)

Dan Loeb's Third Point Offshore Fund is out with its monthly update on positioning and exposures. The key takeaway here is that Third Point has initiated a position in gas producer El Paso (EP) since the fourth quarter.

The second most notable takeaway is that Potash (POT) is no longer among their top holdings. The stock sold-off hard recently, so that could be the culprit. Or, perhaps they sold shares, other holdings appreciated in value, or they ramped up their stakes in other names; it's tough to discern.

Third Point's Top Positions

1. Gold
2. Delphi (both equity & debt)
3. Chrysler (multiple securities owned)
4. El Paso (EP)
5. LyondellBasell (LYB)


Some of the fund's top winners were gold, NXP Semiconductors (NXPI), El Paso (EP), Technicolor (multiple securities owned), and Williams Companies (WMB). Per their latest disclosure, Third Point also now owns multiple securities in NXPI after previously owning just the equity.

El Paso is the second gas related entity they've invested in recently. Third Point bought WMB in the fourth quarter, as did many other hedge funds. You can read about the investment thesis on WMB in the equity analysis section of our new issue of Hedge Fund Wisdom.

The top losers last month in Third Point's portfolio included Wells Fargo (WFC), BioFuel Energy (BIOF), CIT Group (CIT), Accuride (ACW), and Rentokil Initial PLC (RTO in London, RTOKY on the pink sheets). Wells Fargo also appears to be a new equity position for the hedge fund, unless it is a debt stake that has previously been undisclosed; the disclosure is unclear.

Overall, Loeb favors post-reorganization equities. In particular, he's been active in Smurfit-Stone Container (SSCC), opposing the takeover. LyondellBasell (LYB), another post-reorg equity, continues to be one of Loeb's largest positions.

For the month of February, Third Point was up 3.6% and is up 7.6% for 2011 thus far. Its Offshore Fund has now seen an impressive 19% annualized return since inception in December 1996.


Exposure Levels

Regarding their latest exposure levels, Third Point is 56.2% net long equities with its largest net long exposure in basic materials at 12.1% and consumer at 11.5%. Over the past month or so, Third Point has reduced net long equity exposure by almost 5%.

In credit, the hedge fund is 11.5% net long distressed, 16.5% net long asset backed securities (ABS) which include residential mortgage backed securities (RMBS) and commercial mortgage backed securities (CMBS). They are also net short -5.4% government securities, cutting their short exposure to this asset class almost in half.

For a full assessment of Loeb's portfolio and the investment thesis behind some of his picks, head to the brand new issue of Hedge Fund Wisdom that was just released.

Dan Arbess' Xerion Fund Likes Chemical Stocks

Per Bloomberg's Hedge Fund Brief, Dan Arbess' Xerion Fund (part of Perella Weinberg Partners) is betting on chemical stocks. In particular, he likes those companies that utilize lower-cost natural gas in production, such as LyondellBasell (LYB).

Chemical maker LYB emerged from bankruptcy last year and has been a big favorite amongst investment managers. In fact, LyondellBasell was a consensus buy in the fourth quarter amongst hedge funds we track in our Hedge Fund Wisdom newsletter. In addition to Xerion, Dan Loeb's Third Point LLC holds a large stake in LYB as it is their fifth largest position.

Arbess said that, "There are a lot of companies that can just take higher feedstock costs and pass them right on to their customers. They are being sold off very aggressively right now and can be picked up. We liked them 10-15% higher before the sell-off; we love them down here." In addition to LYB, Arbess fancies Solutia (SOA) and Rockwood Holdings (ROC).

Arbess also reiterated his positions in exploration and production oil companies in Brazil and West Africa. We've posted about these investments in a previous investor letter that detailed Xerion's 2011 investment strategy & outlook.

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Jeff Saut: Putting Money to Work in Stocks, But Correction Not Over

Market strategist Jeff Saut is out with his latest commentary and begins with a focus on oil. Unrest in the Middle East has caused prices of black gold to surge from $84 to over $100 per barrel and this is worth keeping an eye on. Turning to his latest stance on the stock market, he thinks the correction is not yet over, even after last week's sell-off.

He writes,

"The recent stock 'high' was accompanied by the most bullish stock sentiment since the DJIA's peak in October 2007 (69% 'Bulls' according to Market Vane); as well, the Volatility Index (VIX/19.22) recorded its lowest reading since the summer of 2007 (read: too much complacency). Ladies and gentlemen, it is rare to see those kind of extreme readings worked off in a mere three sessions. So yeah, I believe the correction has more to run, yet I continue to think it is a mistake to become too bearish."

As such, Saut has gradually begin to put money to work in stocks during the pullback. He sees the intermediate trend as up and thinks you should buy stocks on your watch-list during further sell-offs.

He points to his own watch list and highlights some of the stocks that have held up best like Skyworks Solutions (SWKS), Stanley Black & Decker (SWK), Tempur Pedic (TPX), and Williams Companies (WMB). For the investment thesis on WMB and to see why hedge funds have been buying, we featured the stock in the equity analysis section of the new issue of our Hedge Fund Wisdom newsletter that was just released.

Embedded below is the latest investment strategy from Jeff Saut:



You can download a .pdf copy here.

Warren Buffett's Annual Letter 2010: Key Takeaways

Warren Buffett is out with his 2010 annual letter to Berkshire Hathaway (BRK.A / BRK.B) shareholders. The media has quickly pounced on one key sentence in the letter where he writes, "Our elephant gun has been reloaded, and my trigger finger is itchy." This has spurred a tsunami of speculation as to what company he might buy next. While this is notable language, we also wanted to highlight some of the takeaways from Buffett's letter as noted by fund managers:

- Buffett thinks a housing recovery could begin within the next year or so. In addition to unemployment, housing is one of the key pieces to fully solving the economic puzzle.

- Since we track fund manager holdings on the site, readers will be intrigued to know that you can buy shares at the same level (or even below) what Buffett paid for them in Conoco Phillips (COP), Kraft (KFT), Sanofi Aventis (SNY), and Munich RE. You can view the rest of Buffett's investments in our newsletter.

- While Buffett has been optimistic about the US for a while now, his enthusiasm is as strong as ever.

- Buffett stood by his mantra of 'buying when there's blood in the streets' during the financial crisis and the results showcase why this is a prudent strategy. He spent around $15 billion after Lehman Brothers failed and those investments are now paying off.

Turning back to Buffett's mention of potential acquisitions, you'll recall that Berkshire bought Burlington Northern Santa Fe as it acquired the entire railroad operator after owning a partial stake. He has made it clear that Berkshire needs more major acquisitions like this.

Some investors have argued that Buffett will have to look at private companies for acquisitions due to Berkshire's behemoth size. Will he pursue a public company he already owns a stake in? A public company he has yet to purchase shares of? A private company? Let us know your thoughts in the comments. For Warren Buffett's 2010 annual letter, you can download a .pdf copy here.

For more great resources on one of the greatest investors of our time, check out:

- Warren Buffett's recommended reading list
- Great investing advice via the top 25 Warren Buffett quotes
- Buffett's worst trade
- Compilation of Buffett's partnership letters
- A multi-decade look at Buffett's career