What We're Reading ~ Hedge Fund Links 9/27/13

Seth Klarman's Baupost to return some capital to clients [II Alpha]

Could Bill Ackman's genius be his downfall? [Yahoo Finance]

The U.S. dominates the hedge fund industry [FINalternatives]

Tiger Global launches long-only fund [CNBC]

Stan Druckenmiller: "greatest moneymaking machine in history" [ST50]

Paul Singer hates benchmarking [HF Intelligence]

Hedge funds use Freedom of Information Act to dig for info [WSJ]

Cohen's SAC Capital up 13% for year [Reuters]

Single family offices are negotiating down hedge fund fees [Forbes]

Profile of Jim Chanos [Yale Alumni Mag]

Dalio says Japan needs another big round of stimulus [Reuters]

Buffett calls the Fed history's greatest hedge fund [Bloomberg]

Hedge fund-of-funds in midst of metamorphosis [PI]

Hedge funds cut back on fees [WSJ]

A manager who doesn't mind losing a bet [Dealbook]

Oaktree to sell US foreclosed homes [Reuters]

Money manager takes big stake in News Corp [Dealbook]

John Paulson buys Puerto Rico resort [FINalternatives]

Current SEC priorities regarding hedge fund managers [SEC]

Invest For Kids Chicago 2013: Eisman, Kingdon, Peltz, Lasry, Singh, Cooperman & More

The annual Invest For Kids Chicago Conference is coming up on October 29th and it's their 5th anniversary.  100% of the money raised is donated to 7 Chicago based children's charities.  Modeled after the Sohn conferences, this event has become one of the premier investment conferences and the speaker list this year again confirms this.

Invest For Kids Speakers List

Steve Eisman, Emrys Partners
Mark Kingdon, Kingdon Capital
Marc Lasry, Avenue Capital
Steve Kuhn, Pine River Capital
Lee Cooperman, Omega Advisors
Nelson Peltz, Trian Fund
Dinakar Singh, TPG-Axon Capital
Jeff Gundlach, DoubleLine Capital
Sam Zell, Equity Group Investments
Rick Rieder, BlackRock


Event Details

When: October 29th, 2013
Where: Harris Theater in Chicago, Illinois
Time:  1:30pm to 5:30 pm

This Year's Charities:  The event benefits great causes and this year's beneficiaries are Chicago Youth Programs, Citizen Schools Illinois, Genesys Works Chicago, The Kitchen Community, LEARN Charter School Network, Polaris Charter Academy, and Youth Organizations Umbrella.


Registration

You can register for the event on IFK's website here.  Below is a flyer for the event:

Bloomberg Markets 50 Summit: Hedge Fund Panel Featuring Marcy Lasry, Glenn Dubin & Bruce Richards

We wanted to post up the video from one specific panel at the Bloomberg Markets 50 Summit in New York that featured Marcy Lasry of Avenue Capital, Glenn Dubin of Highbridge Capital, and Bruce Richards of Marathon Asset Management.

Their panel talked about hedge fund strategies and their various outlooks.  Bloomberg's Stephanie Ruhle moderated the discussion and here are some of the highlights.


Marc Lasry's Comments

Lasry noted how banks don't really have trading groups as much, so hedge funds aren't dealing with the banks as much and people "come to you" now and bypassing banks.  They've got one of the largest distressed funds in Europe and lots of banks have approached them about their portfolios.

Lasry argued that smaller hedge funds have to "be up double" what a big fund is to essentially justify all the risks an investor takes on investing in a smaller fund.

"At the end of the day, all you want to be focused on is the net (return).  The reason there's a discussion on a fees is people believe that net returns have come down, and that's because of the risk-free rate."


Glenn Dubin's Comments

Asked if he would started a hedge fund again today given regulatory requirements and the landscape, Dubin said setting up a hedge fund today is much more challenging than it once was. 

He echoed Lasry's comments that banks getting out of various business has led to new opportunities for many hedge funds. 

He also said there's no question the larger funds have a competitive advantage over smaller funds when it comes to accessing dealflow.  He also notes they have an advantage in hiring and the ability to retain top talent as it's a very competitive industry now.

"Fees are an odd issue in our industry."  He feels it's a binary outcome: either you decide to invest in a manager (and the market has set the fees), or you don't.  "To negotiate with a manager is a ridiculous discussion to have."

Dubin thinks the best opportunity now is to step in to provide capital where banks used to, but no longer can due to requirements.


Bruce Richards' Thoughts

Regarding hedge fund fees, he says large institutions want discounts available for big capital allocations to funds and Marathon reduces their fees for these big tickets or longer lock-ups.

"As a global institution, you search  the world for the best risk/reward to make absolute returns." 

Richards also recently spoke at the Alpha Hedge West conference and we've got coverage of his talk there via that link.

Embedded below is the video from the Bloomberg Markets 50 Summit:



For more coverage of the various conferences lately, head to:

- Notes from the Value Investing Congress (Ubben, Roepers, McGuire & more)

- Notes from the Alpha Hedge West Conference (Bass, Burbank, Richards & more)

Jim Chanos & Jim O'Neill on China At Bloomberg Markets 50 Summit (Video)

Kynikos Associates' hedge fund founder Jim Chanos sat down with Jim O'Neill, former Chairman of Goldman Sachs Asset Management at the Bloomberg Markets 50 Summit to chat about China, real estate, and markets.  Here are some of the highlights:

Chanos & O'Neill on China

O'Neill says that most of the reason why China's slowed is because they've deliberately slowed.

Chanos' caution in regards to China stems from credit.  He prefers to bet against China by playing miners, steel companies, construction companies, the building blocks that have boosted the expansion.

O'Neill asked Chanos if he would be against European luxury goods companies that have benefited from a wealthier Chinese consumer and Chanos said he doesn't need to play "third derivative" plays as he's more covered by betting against "first derivatives" such as the miners.

Chanos is bearish on iron ore because he says demand can rise or fall, but there's a ton of supply coming to the market late this year and next year.  Greenlight Capital's David Einhorn has also bet against iron ore.

O'Neill argues that the "old China" is dead and that's what Chanos is betting against.  He thinks it's a great stockpicker's market there as you can bet against old China and bet on new China.

Chanos also recommended a book about China: Red Capitalism.

For other coverage of the Bloomberg Markets 50 Summit, we also posted up video from the hedge fund panel featuring Glenn Dubin, Marc Lasry & Bruce Richards.


Embedded below is the video of Chanos' interview from the Bloomberg Markets 50 Summit:



For more coverage of the various conferences lately, head to:

- Notes from the Value Investing Congress (Ubben, Roepers, McGuire & more)

- Notes from the Alpha Hedge West Conference (Bass, Burbank, Richards & more)

What We're Reading ~ Analytical Links 9/25/13

Notes from the Bloomberg Markets 50 summit [Reformed Broker]

Investing around Obamacare [The Big Picture]

The Buffett formula: how to get smarter [Farnam Street]

Charlie Munger: lessons from an investing giant [WSJ]

Thoughts on Blackberry endgame and Microsoft as a value trap [Aswath Damodaran]

Iron ore seen sliding as new supplies hit [FT]

The benefits of negative feedback [Harvard Business Review]

Mexico's 'Aztec tiger' economy struggles to earn its stripes [FT]

Alibaba said to move toward IPO in the US [Dealbook]

Seeking answers from Green Mountain Coffee [Dealbook]

Apple's Chiefs discuss strategy, market share & new iPhones [BusinessWeek]

7 reasons why Africa's time is now [Harvard Business Review]

Once voracious Zell puts less on real estate plate [WSJ]

The 7 deadly sins of investing [WSJ]

40 maps that explain the world [Washington Post]

Lessons from the Dell deal [Dealbook]

Free SEC filings online master class [Business Journalism]

Wharton offers free online courses copying 1st year MBA study [Bloomberg]

Carlson Capital Files 13D on Boise, Argues Company Worth More Than Recent Buyout Offer

Clint Carlson's hedge fund firm Carlson Capital has filed a 13D on shares of Boise (BZ).  Per the filing, Carlson has revealed a 6.7% ownership stake in BZ with 6,725,000 shares. 

This marks an increase of 449% in their position size since the end of the second quarter. as they've drastically ramped up their stake.  The 13D was required due to activity on September 16th.  While Carlson previously owned BZ shares and were out buying throughout the first half of August, they really ramped up their stake on September 16th & 17th, purchasing shares around $12.5x.


Carlson Argues For Higher Price

On September 16th, Packaging Corp of America (PKG) entered into an agreement for a tender offer to acquire all of Boise at $12.55 per share.

On September 23rd, Carlson sent a letter to the board of Boise arguing that the company is worth between $14 and $17 and that the current offer does not reflect fair value.

Further, the hedge fund argues that a separation of the company's paper and packaging segments would better help the company participate in industry consolidation.  You can view Carlson's full case for the company here.

Per Google Finance, Boise is "a manufacturer of packaging and paper products, including corrugated containers and sheets, containerboard, protective packaging products, imaging papers for the office and home, printing and converting papers, label and release papers, newsprint and market pulp. The Company operates in the United States, Europe, Mexico, and Canada. The Company operates in three segments: Packaging, Paper, and Corporate and Other. The Company’s newsprint is sold primarily to newspaper publishers in the southern and southwestern the United States."

Second Curve Capital Reveals First Marblehead Position

Tom Brown's hedge fund firm Second Curve Capital filed a 13G with the SEC regarding shares of First Marblehead (FMD).  Per the filing, Second Curve has revealed a 5.3% ownership stake in FMD iwth 5,993,522 shares.

This is a newly disclosed position for the hedge fund firm as they did not report an ownership stake at the end of the second quarter.  The 13G was required due to portfolio activity on September 20th.

Per Google Finance, First Marblehead is "a specialty finance company focused on education loan programs for K-12, undergraduate and graduate students in the United States, as well as tuition planning, tuition billing, refund management and payment technology services. It also offers a number of ancillary services in support of its clients, including loan origination, retail banking, portfolio management and securitization services. It offers an integrated suite of services through its Monogram loan product service platform, which the Company refers to as the Monogram platform, as well as certain services on a stand-alone, fee-for-service basis. Its subsidiary Union Federal Savings Bank, which the Company refers to as Union Federal, offers retail banking products, including education loans, residential and commercial mortgage loans, time and savings deposits and money market deposit accounts."

Watershed Asset Management Discloses Erickson Air-Crane Stake

Meridee Moore's hedge fund Watershed Asset Management filed a 13G with the SEC regarding shares of Erickson Air-Crane (EAC).  Per the filing, Watershed has disclosed a 5.5% ownership stake in EAC with 755,413 shares.

This position is revealed due to the company's mandatory conversion of their convertible cumulative participating preferred stock (Series A).  The fund received a notice of mandatory conversion dated August 12th.


About Watershed Asset Management

Meridee Moore founded Watershed after being a partner at Farallon Capital for 10 years.  Watershed focuses  on cash flows and catalysts.


About Erickson Air-Crane

Per Google Finance, the company is "engaged in the operation and manufacture of the Erickson S-64 Aircrane (Aircrane), a heavy-lift helicopter. The Company operates in two segments: Aerial Services and Manufacturing / MRO. Aerial Services offers a range of heavy-lift helicopter services through the Company's worldwide fleet, including firefighting, timber harvesting, infrastructure construction, and crewing services. Manufacturing / MRO manufactures Aircranes from existing airframes, manufactures new components on a contract basis, and provides customers with Federal Aviation Administration and European Aviation Safety Agency certified maintenance, and MRO services in the Company's AS9100 certified facility. In September 2013, Erickson Air-Crane Incorporated announced the completion of its acquisition of Air Amazonia Servicos Aeronauticos Ltda and certain related assets from HRT Participacoes em Petroleo S.A."

Joel Ramin's 12 West Capital Discloses Masonite Stake

Joel Ramin's hedge fund 12 West Capital recently filed a 13G with the SEC and disclosed a new position in Masonite International (DOOR).  Per the filing, 12 West owns 7.3% of DOOR with 2,116,969 shares.

This is a newly disclosed position for the hedge fund and the 13G was required due to portfolio activity on September 9th. 

While the majority of their position is via common stock, they own warrants that allow the fund to purchase 598,385 shares at an exercise price of $50.77 per share (Masonite currently trades around $49.70).

Joel Ramin founded 12 West Capital after working at Roberto Mignone's Bridger Capital, another hedge fund we cover on MarketFolly.  Prior to that, he worked at Blackstone Group.  He founded 12 West in 2011.

Per Google Finance, Masonite is "a designer and manufacturer of interior and exterior doors for the residential new construction; the residential repair, renovation and remodeling, and the non-residential building construction markets. The Company principally operates in North America; Europe, Asia and Latin America, and Africa. The Company markets and sells its products to remodeling contractors, builders, homeowners, retailers, dealers, lumberyards, commercial and general contractors and architects through wholesale and retail distribution channels. Its portfolio of brands includes Masonite, Marshfield, Premdor, Mohawk, Megantic, Algoma, Baillargeon, Birchwood Best and Lemieux."

For more from this hedge fund, we also detailed other portfolio activity from 12 West Capital last month.

JANA Partners Goes Activist on Safeway, Increases Ashland Stake

Catching up on some important news while we were busy with conferences: Barry Rosenstein's activist hedge fund JANA Partners has recently filed a 13D on Safeway (SWY) as well as an amended 13D on Ashland (ASH).


JANA's Activist Investment in Safeway (SWY)

They've filed a new 13D on grocery store chain Safeway (SWY).  They previously owned a tiny position but have recently ramped up their stake and now own 6.2% of the company with 14,950,000 shares.

This marks a 1,114% increase in their position size since the end of the second quarter.  The filing was required due to portfolio activity on September 13th.

The activist filing indicates that JANA has already had discussions with management and specifically mentions their desire to review the markets where the company operates and to exit "subscale and lower margin geographies."  JANA also is looking to return more capital to shareholders and to potentially transfer the company's Blackhawk Network stake to shareholders.

The hedge fund was actively buying shares in July and then ramped up purchases in August, buying around $25 and $26 and as high as $28 in September.

Per Google Finance, Safeway is "a food and drug retailer in North America.  The Company’s United States retail operations are located principally in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas, the Chicago metropolitan area and the Mid-Atlantic region. Safeway’s Canadian retail operations are located principally in British Columbia, Alberta and Manitoba/Saskatchewan. In support of its retail operations, the Company has a network of distribution, manufacturing and food-processing facilities. Safeway owns and operates GroceryWorks.com Operating Company, LLC (GroceryWorks), an online grocery channel doing business under the names Safeway.com and Vons.com (collectively Safeway.com). Safeway also has a 49% interest in Casa Ley, S.A. de C.V. (Casa Ley), which operates 195 food and general merchandise stores in Western Mexico."


JANA Increases Ashland (ASH) Stake

According to an amended 13D filed with the SEC, the hedge fund also has increased its position in Ashland (ASH).  Per the filing, JANA now owns 8.4% of the company with 6,503,180 shares.

This marks a 13% increase in their position size since the end of the second quarter.  The filing was required due to portfolio activity on September 18th.  The bulk of their buying looks to have been done in late August and early September at prices ranging from around $87 to $92.

Just recently, we highlighted that the winner of the Value Investing Challenge was a pitch on Ashland, so you can check out the potential thesis there.

We highlighted JANA's original purchase of ASH shares back in February/April.

Per Google Finance, Ashland is "a global specialty chemical company that provides products, services and solutions throughout a variety of industries. Ashland’s business operates in four segments: Ashland Specialty Ingredients; Ashland Water Technologies; Ashland Performance Materials and Ashland Consumer Markets."


For more on this hedge fund, head to an in-depth interview with JANA Partners here.

Baker Street Capital's Sears Presentation: The Real Estate Long Case

There has been a short-squeeze of sorts going on in shares of Sears Holdings (SHLD) over the past month as SHLD has rocketed from $38 to $62.  At least part of the reason?  The real estate long case making the rounds via a presentation by Baker Street Capital Management.

This stock has been a battleground between hedge fund shorts and value investor longs for quite some time.  Shorts point to a deteriorating retail business, while longs point to the value in Sears' real estate.

Hedge funds like Lone Pine Capital have disclosed put option positions in 13F filings as of Q2 indicating their bearish stance on the company.  On the other hand, Bruce Berkowitz has been long SHLD precisely under the real estate thesis.

Not to mention, you have a hedge fund manager at the top of the SHLD ownership chain via Eddie Lampert as well.

With a smaller float, SHLD shares have rocketed higher lately so let's take a look at what all the fuss is about.


Baker Street Capital's Presentation on Sears Holdings (SHLD):
Valuing the Real Estate

Embedded below is Baker Street Capital's presentation: "The Case For Sears Holdings (SHLD): With Our Proprietary Property-by-Property Real Estate Appraisal."

Ray Dalio & Bridgewater on Economic Principles

Earlier this morning, we posted up Ray Dalio's new video: 'How The Economic Machine Works.'  In conjunction with this video, Bridgewater Associates has also published a draft of 'Economic Principles.'

The .pdf dives into much more depth and highlights an in-depth look at deleveragings (including the 1930's US and Weimar Republic) and also features a look at productivity and why countries succeed and fail over the long term.

The sizable 210-page document is embedded below:



Don't forget to check out Ray Dalio on how the economic machine works if you'd rather view a quick summary.

Maverick's Lee Ainslie on His Career & Advice

Lee Ainslie, founder of hedge fund Maverick Capital, recently sat down with OneWire to talk about his investing and career advice.

Ainslie attended the University of Virginia for undergrad and then went to the University of North Carolina for his MBA and he did that because he thought business school would refine his skills.

There, he met Julian Robertson of Tiger Management and he went to work there afterwards.  He eventually ran the technology effort at the firm and then decided to start his own firm with money from the Wyly family.  He thought it was a good time to take a risk since he was younger and didn't have kids yet.

As to what his biggest challenge is these days, he said: "The biggest challenge for our business is management of talent."  This just goes to show how there are always 2 sides to running a hedge fund: the investment side and then the management of the business itself. 

He also touched on his advice for those looking to get a career on Wall Street:  He said he'd look to where he can add value on a sustainable basis because Wall St as a whole will be more challenging going forward.

Embedded below is OneWire's interview with Lee Ainslie:

For more hedge fund manager advice, head to Philippe Laffont's career advice as well as Andreas Halvorsen on investment process.

Legendary Investor Stan Druckenmiller's Recent Interviews

Legendary investor Stan Druckenmiller (formerly of Soros Fund and Duquesne Capital) has historically avoided the media spotlight but recently has given a few interviews that we wanted to consolidate into one post.  We've put them in chronological order with the oldest from 2 weeks ago first, then moving down to the most recent at the bottom.


Druckenmiller's Bloomberg Interview 

A few weeks ago, Druckenmiller sat down with Bloomberg and said that, "I probably have the smallest positions I've had (in a while)."  He also made it clear that he's very focused on who the next Fed Chairman will be and how that will effect QE and the markets.

In the interview, Druckenmiller said he thinks the market is topping.  However, since this interview, Larry Summers has withdrawn his name from consideration which has affected his thinking.  At the time, it seemed as though Summers would have been a negative for markets due to his desire to raise rates.

Druckenmiller went on to say, "It's my belief that QE has subsidized all asset prices and when you remove that subsidization, the market will go down." At this time, he said he was long some Japanese equities, short some Yen, but these position sizes are smaller than they were at the beginning of the year.


Embedded below is the video of Stan Druckenmiller's Bloomberg interview:




Druckenmiller's CNBC Interviews

He also appeared on CNBC and gave his thoughts on a myriad of topics. He said the Fed blew its chance to taper since the market was already somewhat expecting it and now it will be that much harder to actually start the process when it's time.

Druckenmiller also said that,  "I will bet from beginning to the exit, the wealth effect from QE will have been negative not positive" because he thinks once QE goes away, the market can effectively drop and re-price on 'no volume.'

On Yellen's potential appointment & no tapering:  "(It's) very bullish for markets intermediate term.  We're going into extra innings; the punch bowl was about dry and 2 new waiters are coming in and we're really gonna party now."  His comments in the prior paragraph are more long-term in nature but it's clear he sees these recent developments as bullish in the near-term.

Embedded below is video 1 (Druckenmiller's comments start around halfway through):




For more from this great investor, check out lessons from Stan Druckenmiller in Hedge Fund Market Wizards.

Warren Buffett Says Stocks Fairly Priced: Recent Interview

The last few weeks have been busy with our notes from the Value Investing Congress as well as notes from Alpha Hedge West Conference so today we're catching up on some notable comments made by investing legends recently.  Warren Buffett appeared on CNBC and here are his thoughts:

On stocks/the market:  "They've moved a long way.  They were very cheap 5 years ago.. ridiculously cheap.. and that's been corrected.  They're probably more fairly priced now.  We don't find bargains around, but we don't think things are way overvalued either.  We're having a hard time finding things to buy." 

On tapering: He says the decision to taper or not and by how much doesn't really affect his businesses or investments.

On QE3:  Buffett reiterated that it hasn't really been successful but he doesn't think it's been harmful either.

On the economy: He feels it's just been a gradual increase since 2009.  It's been improving but he thinks Bernanke has wanted to see a greater improvement.

On the Fed Chair:  Buffett thinks Bernanke's done a terrific job since the panic and ought to get a chance to continue on.  Asked if he has a second choice for the new Fed Chair, he said he doesn't have one.

Embedded below is the video of Warren Buffett's recent CNBC appearance if you missed it:



For more from the Oracle of Omaha, head to some new book recommendations from Warren Buffett.

Ray Dalio on How the Economic Machine Works

Ray Dalio, founder of hedge fund Bridgewater Associates, just released a video entitled How The Economic Machine Works (in 30 minutes).  In it, he strives to outline the viewpoint that's guided him over the years.

3 Main Forces That Drive The Economy

Dalio identifies 3 main forces:

1. Productivity growth
2. Short term debt cycle
3. Long-term debt cycle

He also says that, "credit is the most important part of the economy and probably the least understood."  Dalio also notes that it's the biggest and most volatile part of the equation.  He opines further below.

Embedded below is Ray Dalio's video of how the economic machine works:



For more from this hedge fund manager, we've highlighted lessons from Ray Dalio in Hedge Fund Market Wizards.

Alpha Hedge West Conference Notes 2013

We're posting up notes from the 2013 Alpha Hedge West Conference that just took place in San Francisco.  There were numerous panels discussing various topics and summaries are available by clicking each link below:


Notes From the Alpha Hedge West Conference

- Macro Discussion: John Burbank & Kyle Bass on China, Europe, Japan, Argentina & More

- Navigating the Macro & Interest Rate Environment:  Bruce Richards (Marathon Asset)

- Best Ideas Panel:  Kurt Billick (Bocage Capital), Peter Lupoff (Grayco Alternative), Worth Gibson (Forest Hill Capital), Paul Twitchell (Whitebox)

- State of the Hedge Fund Union: Jason Huemer (Visium), Bruce Richards (Marathon), Philip Weingord (Seer Capital) 

- Condition of the Consumer & Challenges for Investors as Economy Expands: Joseph Brusuelas, Senior Economist, Bloomberg & Kristin Bentz, PMG Venture Group 

- On Hedge Fund Seeding: Rachel Minard, Jeffrey Cozad, Basil Williams, Jonathan Miles

- Opportunistic Credit Roundtable: Emanuel Friedman (EJF Capital), Andrew Springer (Marathon Asset), Ronnie Jaber (Carlyle Group), Avery Kiser (Neuberger Berman Alt)

- The Role of Volatility: Michael Schmanske (Glenshaw Capital), Christopher Cole (Artemis Capital), Zem Sternberg (Lake Hill Capital), Joe Reynoso (Reynoso Asset)

- Structured Credit: Richard d'Albert, Christopher Hentemann, Amin Majidi, Rajesh Agarwal

- Dynamic Investment Panel:  John Claisse, Joy Xu, Andrew Karsh

- Next Generation of Hedge Fund Managers: Michael Sedoy, Neal Shah, Valtura Capital, Mike Keough, John Rende

- Venture Capital Panel: Where Are They Investing And Why? Pat Grady, Chris Schultz, Ron Suber, David Girouard

John Burbank & Kyle Bass Macro Discussion at Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the panel featuring a macro discussion between John Burbank of Passport Capital and Kyle Bass of Hayman Capital.  They touched on China, Argentina, Japan, and many other topics.  Below is their dialogue and JB = Burbank's comments and KB = Bass' comments.


John Burbank & Kyle Bass' Macro Discussion: Alpha Hedge West

KB> First part of taper will be easy.  Fiscal drag of moving Fed Funds from 0% to 3% will be large. 

JB> Does not think Fed policy changes unemployment.  Labor in China first, now technology have a great impact on unemployment.  Firms don't want to hire.  Structural unemployment issues will persist most of our lifetimes.  JB is shifting into equities.  Likes equities with good governance and high quality business.  Not bullish on GDP or global economy or US economy.  Credit got crowded last year.  Equity just getting started.  Companies have gotten very lean and efficient.  Emerging Markets (EM) have been struggling.  That was due.  Development Markets (DM) will outperform EM.  Not that US economy is great, just that US is quality.  As EM people grow, they will want more DM goods, not EM goods.

China

KB> Not investing in China now.  "Univestible" due to banks and shadow banking systems.  Staying away from India too.  Branded luxury and quality did well post crisis.  China has not adjusted from command and control.  Appears Chinal will work, but he think it won't (success is illusory at this point).  Sees restructuring.

JB> His portfolio has turned on its head since 2000 with the exception of internet companies.  Everything in China is rising.  EM and most commodities went up on the industrialization of China.  Won't happen again.  Short the mining companies.  Those businesses have bad economics except when times are really good. Chinese internet companies are winning over US internet companies in China because the Chinese government won't let the Chinese companies lose to US ones.  Internet companies in China at new highs are the ones you probably want to own.  Short EM and Mining.

Why does Bass like Argentina?

KB> People don't understand what is happening there.  Lots of things there are fixable.  Leadership in control has "issues" :).  Energy has been an issue, but recently there have been major energy findings that will change that.  2 years from now, he thinks there will be a new President in October 2015 and pro business people will be running things to take advantage of vast prairies of nature resources.  Argentina's problems can be fixed in 2 years.  Now is the time to start investing.  Sees 50% upside in the sovereign debt.

JB> Would not play Argentina's equities.  Tough betting on turnarounds.  Does not believe in value.  Believes in mispriced growth.  Kyle might be right about Argentina.

KB> "When I'm Right."

Burbank: Long Saudi / Short Russia 

JB> Likes Saudi...though their neighbors are a problem.  He is one of the best informed US investors re: Saudi.  95% of investors in Saudi are local traders. 

Moderator> Is there an opportunity for a paired trade with Saudi?

JB> Short Russia.  Saudi has been crushed.  Instead of easing, they tightened.  They've lagged.  No one wants to invest there.  Aramco would be the largest company in the world by a factor of 10 if it were a public company.  Saudi is like a 1990s EM story in a time capsule.  Dollar rally would crush EM.  Mining gets crushed without rise in commodities.  In '03 and '04 most wouldn't invest in EM.  Now they can't be talked out of investing in EM.  San Francisco is the opposite of EM.  EM has high volumes of low skilled labor.  SF has relatively high concentrations of high skilled labor.  Most people don't understand tech.  Transformational tech requires less capital than ever.  This means lower margins for others.  EM not capable of embracing technology.  SF is impervious to risks like weak GDP, interest rates, etc.  Tech has been camoflauged by rising prices everywhere.  New tech is where you want to be.  Those are "safe" strangely enough.  Investors don't even like to travel to SF.  That will change in the next 3-5 years.

Moderator> Are early stage private companies better investments for tech?

JB>Want to own "Venture Debt".  Low risk.  Even low tech does well.  Innovation premium starting to be revealed.  Want to just be in top 5 or 6 venture funds.  Look for services.  Google is 300B market cap.  Facebook & Twitter.  Not that many tech hedge funds.

Japan

KB> US Recapped.  EU is 3.5x more leveraged than the US.  At some point, debt will matter.  Has always eventually mattered the last 2000 years.  When debts are 24 times revenues you are finished, it is just a matter of when.  Hopes he is wrong.  More he looks, the more he thinks it will happen.  Sees it happening the next few years.  Avoid Europe.  US is 4.5x debts to revs.  Japan is 24.

JB> Dollar is better than Yen or Euro.  Better chance for dollar to rally than market is pricing in.  Chart of S&P to EM tracks closely to dollar chart.  Similar to US in late 90s.  Not because of strength, but due to quanlity and governance in US compared to elsewhere.  Likes Quality in US then betting on low quality of EM.  Believes in multi-year trends until something reaches consensus.  Then you have reversion to mean.

How should mutual funds feel about Macro risks?

KB> If I were long only, I would not be able to sleep at night.  A Japan crisi could not be contained.  It would have huge impacts.

JB> Joke: mutual fund managers happy as long as they beat the benchmark.  This is an era where you want to own the best.  In Silicon Valley it is like winner take all.  Not enough premium on best of breed.

KB> During the Tequilla crisis, Mexican equities down 90%, even with 10x appreciation, you just break even.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Bruce Richards on Navigating the Macro & Interest Rates: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is a talk by Bruce Richards of Marathon Asset Management.  He focused on navigating the macro & interest rate environment.


Bruce Richards' Talk at Alpha Hedge West 

 If Yellen is nominated, she'll be a shoe-in.  Very Dove-ish.  QE is worth 150 BPS.  10 year was 4% 5 years ago.  Most of rate exposure likely is over.  Can get to 3.25% or 3.5%.  Thinks Fed won't sell Bond Portfolio.  They'll hold and let it roll off.  Maybe reverse repo.  

Where do you invest?  Invest in equity, deeply discounted assets.  Events and special situations.  Short duration, high yield.  

Avoid long dated fixed income, treasuries, agencies, high grade debt, leveraged fixed income, interest rate sensitive sectors.  If floating rate, still need credit story.  

Macro risk factors:  Interest rate risk, fiscal/ debt ceiling, Syria and Middle East, sluggish growth in emerging markets, US, Euro, China, Japan, Flow of Funds.  

Best Opportunities: Europe, Distressed Corporate, Special Situations / Distressed Bank Asset Sales (NPLs), US Special Situation and Distressed Credit Investments, Structured Credit, Liquid Seasoned Burned Out & Illiquid High Yield, Europe Debt Oppys today like RTC oppy back in 80's.  Will be available next few years.  

Bought a $1.2B pack from a UK bank made of German debt.  84 cents on dollar.  TXU may be biggest non-financial bankruptcy ever.  $48B.  Expect announcement later this year.  Emerging markets are overreacting.  They are at an interim low.  Good hedge funds managers make LIBOR plus 500 BPS.


Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Best Ideas Panel From Alpha Hedge West Conference: Billick, Gibson & Twitchell

Next up in our series of notes from the Alpha Hedge West Conference is the best ideas panel featuring Kurt Billick (Bocage Capital, Peter Lupoff (Grayco Alternative Investments, Worth Gibson (Forest Hill Capital), and Paul Twitchell (Whitebox Advisors).


Best Ideas Panel at the Alpha Hedge West Conference

Kurt Billick: Best idea is companies owning US Refining assets.  Advantage over peers.  US growing production significantly.  By Mid 2014 more gas at gulf than refining capacity.  Input cost will go down.  Also, natgas used to refine oil provides another cost advantage.  Finally, refiners can use MLP's to reduce cost.  Likes Marathon, Holly, Tesoro and Northern Tier.

Peter Lupoff:  Seismic Shift Towards A New Social Contract, Quantitative Strategy.  Div paying stocks outperform in down market.  Divs add fixed income component to equities.  Social contract is trend now.  Social contract looks at ROIC and FCF.  Shareholder friendly behaviors and events, dividends and increases, special dividends, buybacks, spinoffs, etc.  Social contract not altruistic.  Done for survival.  Div rate not good enough.  Key is sustainability of div vs debt financed divs.  Governance is key.

Worth Gibson: Long/Short Equity.  Over $700M in AUM.  Based in Little Rock, Arkansas.  Focused on community and regional banks.  Best idea is CenterState Banks (CSFL).  Like good geographic economies, seasoned management, strong capital, strong shareholder value enhancement strategy, expanding market share profits and tangible BV, heavily discounted valuation.  Center State Banks:  Assets up 125% vs 4.1% for index from 12/31/08 to present.  Will grow earnings.  Sees stock up 90% over next 2 years with 20% growth in BV each year and BV multiple growing to 2 to 1.

Paul Twitchell:  View biggest risk to investors is rapid increase in rates.  Originally was just short on rates.  Now with some rise in rates, they've found complicated sub prime investment with positive carry of 7% to 9% with no rate change.  With shock from higher rates investment still does well.  Investment basically has coupon payment but no return of principle.

How concerned is everyone about the interest rate environment?

WG> When they've run sensitivity analysis to rates, their banks perform favorably.

PL> Companies that have opposite of social contract are good potential shorts.

KB> Lots of companies will get hurt by taking advantage of low rates... i.e. unsustained large dividends.

 

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

State of the Hedge Fund Union Panel: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the State of the Hedge Fund Union with a talk featuring Jason Huemer (Visium), Bruce Richards (Marathon Asset), and Philip Weingord (Seer Capital).

Comments below: JH = Jason Huemer, BR = Bruce Richards, PW = Philip Weingord


State of the Hedge Fund Union 

Investors as shock absorbers.  Most investors want hurdle rate.  Funds haven't had "rogue" trader issues.  Big funds had inflows, small individual funds had outflows.  Cult of personality.

BR> Only need to get past cult of personality if you want to grow after founder passes.  Institutional key to growing.  Marathon manages over $11B in AUM.  Team of partners together over 18 years.  All that history makes for a strong team with collective wisdom.  

JH> Have tried to move from one star.  Investors looking for and want something beyond "one" guy.  Worked for Jamie Dimon and Steve Cohen.  They have 50 risk takers.  They have over $5B in AUM.  No one controls P&L.  5 years ago known only as health care...had to move model to multi-strategy.  It took 5 years of beating market by 1000 bps to convince people.

CH> Agrees with Joseph Brusuelas that we are in a structural break.  Means old trends + stats not reliable.

PW> Fed tightening will equal outflows from bond funds...probably for 2 years.  History says credit spreads normally come in during fed tightening.  Oppys are floating rate...swap fixed rate for floating rate.  Prefers stronger credit vs. High Yield Bonds.

JH> Has created alt mutual fund.  Brick Lake was early proponent of Alt Mutual Funds.  Log jam reason for delay.  So many funds did not want to move down value map... other folks missing tools to move up.  Sub-advisor in a couple mutual funds.  Big funds saw move from fees to like 50 BPS from 110 BPS.  Sees folks moving to multiple manager products and single manager products.  In time, 25% of fees from mutual funds will be Alt Mutual Funds.

BR> How do liquidity needs of Alt Funds impact types of strategies?  For example, can't offer liquidity in/out for say distressed debt funds.  Excited about JOBS Act.

PW> Closed end funds can address some issues of liquidity caused by open end Alt Mutual Funds.

CH> Regulation?

PW> Hedge funds least to blame for financial crisis.  If regulation increases confidence, then it is ok.  Increases some cost and takes time.  Form PF.  Lots of it is silly questions, not know what is meant by some questions.  Not al funds should have same questions.  Overall, ok.

BR> Been registered with SEC over a decade now.  Registered with numerous regulatory bodies.  Would prefer to have one strong regulator.  Look at JPM and recent announcement of hiring like 5,000 employees.  If there were consolidated regulation, it could be better and more efficient.

JH> Regulators have been unfair to hedge funds with high profile and heavy handed tactics.

PW> Market not overreacting to speculation of Bernanke replacement.

BR> If Yellen gets job, she'll be more Bernanke than Bernanke.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.