Archive for the ‘Hedge Funds’ Category

Fantastic Michael Burry UCLA Commencement Speech on U.S. & European Financial Crises

Sunday, June 24th, 2012

Below you can view an excellent speech by Dr. Michael Burry, who at one point shorted over $8 billion of subprime mortgage backed securities before the U.S. credit crisis. Dr. Burry openly shares his experiences on divorce, luck, finance, and the future of college graduates at UCLA. As an alumnus of UCLA, Dr. Burry shows that passion, curiosity, foresight, and “working smart” rather than “working hard” can be handsomely rewarded. Michael Burry’s hedge fund, Scion Capital ultimately recorded returns of 489.34% (net of fees and expenses) between its November 1, 2000 inception and June 2008. The S&P 500 returned just over two percent over the same period. Other than Dr. Burry’s subprime short, I am not sure of his performance from 2000 through 2005. Enjoy.

[youtube]http://www.youtube.com/watch?v=1CLhqjOzoyE&feature=share[/youtube]

Burry left work as a Stanford Hospital neurology resident to become a full-time investor and start his own hedge fund. He had already developed a reputation as an investor by demonstrating astounding success in “value investing,” which he wrote about on a message board beginning in 1996. He was so successful with his stock picks that he attracted the interest of such companies as Vanguard, White Mountains Insurance Group and such prominent investors as Joel Greenblatt.
.
After shutting down his web site in November 2000, Burry started Scion Capital, funded by a small inheritance and loans from his family. The company was named after The Scions of Shannara, a favorite childhood book. Burry quickly earned extraordinary profits for his investors. According to Lewis, “in his first full year, 2001, the S&P 500 fell 11.88 percent. Scion was up 55 percent. The next year, the S&P 500 fell again, by 22.1 percent, and yet Scion was up again: 16 percent. The next year, 2003, the stock market finally turned around and rose 28.69 percent, but Mike Burry beat it again—his investments rose by 50 percent. By the end of 2004, Mike Burry was managing $600 million and turning money away.”
.
In 2005, he veered from value investing to focus on the subprime market. Through his analysis of mortgage lending practices in 2003 and 2004, he correctly forecast a bubble would collapse as early as 2007. Burry’s research on the runaway values of residential real estate convinced him that subprime mortgages, especially those with “teaser” rates, and the bonds based on these mortgages would begin losing value when the original rates reset, often in as little as two years after initiation. This conclusion led Burry to short the market by persuading Goldman Sachs to sell him credit default swaps against subprime deals he saw as vulnerable. This analysis proved correct, and Burry profited accordingly. Ironically Burry’s since said, “I don’t go out looking for good shorts. I’m spending my time looking for good longs. I shorted mortgages because I had to. Every bit of logic I had led me to this trade and I had to do it”.
.
Though he suffered an investor revolt before his predictions came true, he earned a personal profit of $100 million and a profit for his remaining investors of more than $700 million. Scion Capital ultimately recorded returns of 489.34 percent (net of fees and expenses) between its November 1, 2000 inception and June 2008. The S&P 500 returned just over two percent over the same period.
.
According to his website, he liquidated his credit default swap short positions by April 2008 and did not benefit from the taxpayer-funded bailouts of 2008 and 2009.[13] He subsequently liquidated his company to focus on his personal investment portfolio.
.
In a April 3, 2010, op-ed for the New York Times, Burry argued that anyone who studied the financial markets carefully in 2003, 2004, and 2005 could have recognized the growing risk in the subprime markets. He faulted federal regulators for failing to listen to warnings from outside a closed circle of advisors.
.
In April 2011, he suggests: (1) Open a bank account in Canada, (2) there are opportunities in small cap stocks, and (3) blue chips may be less attractive than their price-earnings suggests.

Burry left work as a Stanford Hospital neurology resident to become a full-time investor and start his own hedge fund. He had already developed a reputation as an investor by demonstrating astounding success in “value investing,” which he wrote about on a message board beginning in 1996. He was so successful with his stock picks that he attracted the interest of such companies as Vanguard, White Mountains Insurance Group and such prominent investors as Joel Greenblatt.After shutting down his web site in November 2000, Burry started Scion Capital, funded by a small inheritance and loans from his family. The company was named after The Scions of Shannara, a favorite childhood book.


Burry quickly earned extraordinary profits for his investors. According to Lewis, “in his first full year, 2001, the S&P 500 fell 11.88 percent. Scion was up 55 percent. The next year, the S&P 500 fell again, by 22.1 percent, and yet Scion was up again: 16 percent. The next year, 2003, the stock market finally turned around and rose 28.69 percent, but Mike Burry beat it again—his investments rose by 50 percent. By the end of 2004, Mike Burry was managing $600 million and turning money away.” In 2005, he veered from value investing to focus on the subprime market. Through his analysis of mortgage lending practices in 2003 and 2004, he correctly forecast a bubble would collapse as early as 2007.

Burry’s research on the runaway values of residential real estate convinced him that subprime mortgages, especially those with “teaser” rates, and the bonds based on these mortgages would begin losing value when the original rates reset, often in as little as two years after initiation. This conclusion led Burry to short the market by persuading Goldman Sachs to sell him credit default swaps against subprime deals he saw as vulnerable. This analysis proved correct, and Burry profited accordingly. Ironically Burry’s since said, “I don’t go out looking for good shorts. I’m spending my time looking for good longs. I shorted mortgages because I had to. Every bit of logic I had led me to this trade and I had to do it”. Though he suffered an investor revolt before his predictions came true, he earned a personal profit of $100 million and a profit for his remaining investors of more than $700 million. Scion Capital ultimately recorded returns of 489.34 percent (net of fees and expenses) between its November 1, 2000 inception and June 2008.

The S&P 500 returned just over two percent over the same period. According to his website, he liquidated his credit default swap short positions by April 2008 and did not benefit from the taxpayer-funded bailouts of 2008 and 2009. He subsequently liquidated his company to focus on his personal investment portfolio. In a April 3, 2010, op-ed for the New York Times, Burry argued that anyone who studied the financial markets carefully in 2003, 2004, and 2005 could have recognized the growing risk in the subprime markets. He faulted federal regulators for failing to listen to warnings from outside a closed circle of advisors. In April 2011, he suggests: (1) Open a bank account in Canada, (2) there are opportunities in small cap stocks, and (3) blue chips may be less attractive than their price-earnings suggests.

Icahn Capital Returning All Investor Funds

Friday, March 11th, 2011

Weeks after Shumway and Level Global returned capital to shareholders, Carl Icahn has decided to liquidate the outside investor interests in the hedge fund he started in 2004.  Icahn currently runs the $7 billion fund, of which $1.7 billion is outside capital.  He has asserted that he simply does not want to be responsible for losing other people’s funds if there is another financial crisis.  As the end of quantitative easing nears, Icahn could be dreading the worst.  Recently, Oaktree also returned about $3 billion from a large distressed fund and Baupost announced that it would be returning 5% of capital to investors.  On the other hand, Appaloosa just announced that it will be investing in other hedge fund strategies. Many managers are worried as the market has rallied 95% over the past two years, a remarkable rally.

Icahn’s fund rallied 33% in 2009 and 15% in 2010.  The fund was up 8.7% in the first two months of 2011.

According to Marketwatch, Carl Icahn is returning all outside money from his $7 billion hedge-fund firm because the activist investor doesn’t want to be responsible for losing other people’s money if there’s another financial crisis, according to a letter he sent to clients.

“While we are not forecasting renewed market dislocation, this possibility cannot be dismissed,” Icahn wrote in the letter, a copy of which was obtained by MarketWatch Tuesday.

Bargains for stock investors
Value-stock investors can find buying opportunities in any market climate. Michael Scanlon, co-manager of John Hancock Large Cap Equity Fund, talks about three stocks he sees as bargains: Microsoft, Sirius XM and Lazard.

“Given the rapid market run-up over the past 2 years and our ongoing concerns about the economic outlook, and recent political tensions in the Middle East, I do not wish to be responsible to limited partners through another possible market crisis,” he added.

“After careful consideration of all relevant factors, we have determined to return all fee paying capital to investors,” Icahn also said.

Appaloosa, Baupost

A strong rebound in equity and credit markets over the past two years has left fewer investment opportunities, encouraging several hedge-fund managers to return cash to outside investors.

David Tepper is planning to return money after his Appaloosa Management generated big gains in 2009 and 2010.

Reuters

Carl Icahn
“The point is we’re not an asset gatherer,” Tepper said in a MarketWatch interview last week. A final decision partly depends on what happens in the markets, he noted.

“The world could blow up and we won’t return money because there’ll be more opportunities,” Tepper said. Read about his tentative plans to back other hedge-fund managers.

Baupost Group, a top value investing hedge-fund firm run by Seth Klarman, said in November that it planned to give back about 5% of its capital to investors because rising markets have reduced the number of profitable opportunities. Read about Klarman’s decision here.

‘High note’

Icahn’s hedge funds returned 33.3% in 2009, before fees, and 15.2% in 2010. In the first two months of 2011, they were up 8.7%, he noted in his letter to investors.

“Based on the past 2 years and 2 months we are ending on what I consider to be a high note,” Icahn wrote.

Icahn has been an activist investor in his own right for many years. In 2004, he launched a hedge-fund business, just as activist hedge funds were hitting their stride.

A low point for Icahn’s hedge-fund foray came in 2008, when the funds lost money in the global financial crisis.

“While it may sound ‘corny’ to some, the losses that were incurred by investors in our funds in 2008 bothered me a great deal more, in many respects, than my own losses,” Icahn wrote. “Perhaps this is because over the years I have become inured to dealing with large ‘paper’ losses for myself.”

In the midst of the crisis, many hedge funds limited investor withdrawals or froze redemptions completely. Icahn didn’t do that and his investors pulled a lot of money out.

“Rather than liquidating positions that we believed in, we infused our own new capital into our funds which provided cash for withdrawing investors,” Icahn explained.

That meant Icahn’s own money and money from other partners of the firm made up a lot more of the capital in his hedge funds.

Fee-paying assets now total $1.76 billion, about a quarter of total assets of roughly $7 billion, Icahn noted.

Alistair Barr is a reporter for MarketWatch in San Francisco.

Please visit http://www.leverageacademy.com/curriculum_investing.php to sign up for our intensive investment banking, private equity, and sales & trading courses in Boston & New York.  Classes will also be held online, live through video feeds at these locations.  The discount code Merger34299 will be activated until April 15, 2011.  Questions?  Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.

Top Hedge Fund Managers of 2009

Wednesday, March 9th, 2011

Hedge fund pay has always been astounding, but few realize that it is only a handful that make over $1 billion per year.  BBC recently released a report highlighting some of the most successful alternative asset managers in the world, which include David Tepper, George Soros, Steve Cohen, Edward Lampert, and Ken Griffin.

According to BBC, HF managers “wouldn’t even consider getting out of bed for the $13m (£8m) Goldman Sachs’ boss Lloyd Blankfein was paid last year. Such a trifling pay packet represents just a few days’ work for these staggeringly well-paid financial executives. If bankers inhabit a different world, says London-based headhunter John Purcell, “these guys are out on their own in a different universe”.

‘Private bunch’

So just how much do these guys – for the vast majority are men – earn each year? At the very top of the pile, we’re talking $4bn. Just in case that hasn’t quite registered yet – that’s four billion dollars. This does, of course, include bonuses and fees as well as salary. In fact, the salary is a tiny fraction of their overall pay. And who are these men? They are called hedge fund managers – in other words, they are investors who buy and sell all manner of financial instruments with the express aim of making money for their clients, and for themselves. Finding out much about them is notoriously difficult. ”They’re a very private bunch,” Mr Purcell explains, “largely because they earn so much. They are highly secretive in every aspect of what they do.” Discovering how they make their money is a little easier.

Popular myths

Hedge funds are actually one of the most misunderstood of all financial products. They get something of a bad rap, largely due to some spectacular failures, most notably Long Term Capital Management, which blew up in 1998 and almost took Wall Street with it, and Amarinth Advisors, which lost billions of dollars in a few weeks on bad natural gas trades in 2006. Many have also tried to blame them for some of the excessive risk-taking they say triggered the global financial crisis, but with little success. As one industry insider argues, hedge funds are worth around $1.5 trillion in total – “less than the assets that some individual banks have on their books”. Hedge funds, then, are not the the gung-ho, high-risk beasts of popular mythology. In fact, the majority are quite the opposite, seeking to produce what are called absolute returns – those over and above what you get from the bank, risk free – year in, year out. In other words, they are designed to be low risk. What sets them apart from most investment funds is the range of instruments they can use and the strategies they can employ. Whereas traditional fund managers buy shares and bonds in the hope that they will rise in value, or occasionally dabble in financial derivatives, their hedge fund counterparts can do so much more. For example, they can take advantage of movements in interest rates and currencies, company restructuring and bankruptcies, and pricing anomalies across different markets. One of their most important strategies is shorting – borrowing shares to sell into the market in the expectation that they will fall, then buying them back at the lower price. This means they can make money when markets fall.

Results business

This investment freedom is what attracts so many investment managers to hedge funds. That and the quite extraordinary sums of cash that the very best can earn, of course. In fact, many are not ready for the challenge. Encouraged by potentially huge fees, they begin running portfolios without the necessary knowledge and experience of the strategies they employ. As a result, many come unstuck. And this is one reason why it is rather unfair to compare directly the pay of hedge fund managers with that of bankers. For there is a very crucial difference – hedge fund managers get paid bonuses only when they make money. In other words, there is no reward for failure in this highly competitive business. Salaries in the industry are not dissimilar to those paid in investment banking, so to make seriously mind-boggling amounts of cash, managers need their performance-related fees. These typically amount to 20% of any returns made on a portfolio above a set benchmark, and this is how hedge fund pay rockets into the stratosphere and beyond. But for those that make no returns, through no one’s fault but their own, of course, the rewards are less attractive. In fact, the large number of managers who set up on their own don’t even have a salary to fall back on, although they do take a 2% management fee on the funds they manage. For this reason, “a lot of managers are not making any money at all,” says the industry insider. Equally, hedge fund managers invariably have their own money invested in the funds that they run, unlike bankers who generally stake other people’s cash. ”Investors are very keen to see the fund management company have ‘skin in the game’,” says Mr Purcell.

Celebrity pay

It’s also important to bear in mind that the very best-paid hedge fund managers – the John Paulsons and George Soroses of the industry – own their own companies. They take a cut on all the assets under management across a number of funds run by their firm. In other words, George Soros owns Soros Fund Management. By contrast, Lloyd Blankfein does not own Goldman Sachs. And while it’s relatively easy to find out what the boss of a public company owns, it’s far harder to discover what the owner of a private company pays him or herself. Individual hedge fund managers actually earn a fraction of what their employers earn – on average $4.9m in 2007, the last year for which figures are available. Still, nice work if you can get it. In fact, when it comes to comparisons, bank bosses are nowhere near the best paid executives of even publicly-listed companies. H Lawrence Culp Jnr, boss of US manufacturing and technology group Danaher, was paid $141m in 2009, while Larry Ellison, head of technology giant Oracle, got $130m, according to Forbes. Not even sports starts or actors can match that – Tiger Woods, for example, earned $91m, while Johnny Depp pulled in $75m. In the UK, the boss of consumer goods group Reckitt Benckiser, Bart Becht, was awarded £93m ($148m), while Sir Terry Leahy, outgoing chief executive of supermarket group Tesco, earned £18m, according to research company IDS.

Charitable giving

Staggering sums they may be, but they pale into insignificance compared with the multi-billion dollar packages the very top hedge fund managers earn. It is important not to forget the huge amounts in tax that those managers not based in tax havens, of which there are many, pay. Many also donate vast sums to charity and have become well-known philanthropists. Carl Icahn, for example, who earned $1.3bn in 2009, recently signed up to the Giving Pledge, a club of billionaires who have promised to give large chunks of their wealth to charity. Still, whichever way you look at it, $4bn sure is a lot of dough for one man to be earning over many lifetimes, let alone one year.

Are they worth it?

No doubt a good number of their clients, which include many the world’s biggest pension funds, will say that they are. Their tailors may well agree. Others may take a slightly different view.

Hedge fund rich list 2009

Hedge fund manager Hedge fund group Earnings
SOURCE: AR MAGAZINE
David Tepper Appaloosa Management $4bn (£2.5bn)
George Soros Soros Fund Management $3.3bn
James Simons Renaissance Technologies $2.5bn
John Paulson Paulson & Co $2.3bn
Steve Cohen SAC Capital Advisers $1.4bn
Carl Icahn Icahn Capital $1.3bn
Edward Lampert ESL Investments $1.3bn
Ken Griffin Citadel Investment Group $900m
John Arnold Centaurus Advisors $900m
Philip Falcone Harbinger Capital Partners $825m

Check out our intensive investment banking, private equity, and sales & trading courses! The discount code Merger34299 will be activated until April 15, 2011. Questions? Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.


Tepper Nabs BofA’s Star Banker, Kaplan!

Wednesday, March 2nd, 2011

March 2, 2011: Tepper, the legendary founder of Appaloosa, the man who bought BAC at $3.00 and made $4 billion last year just outdid himself. One of Tepper’s biggest positions is Bank of America, and he just hired their head of mergers & acquisitions, Jeff Kaplan (we can only hope that their is no insider information exchanged, so that Tepper can stay in business). I lost some faith in the HF industry when Shumway and Level Global closed over the past two weeks. BAC has its hands tied, as the firm’s only bidder in the depths of the recession now seems to be its enemy…nice knowing ya Mr. Kaplan. The Bernanke put has made Tepper exceedingly jolly and audacious, as one can see clearly in the photograph above.

Bank of America Corp., the biggest U.S. lender by assets, said Steven Baronoff will assume Jeff Kaplan’s duties leading mergers and acquisitions.

Kaplan is leaving to join hedge fund Appaloosa Management LP, the Charlotte, North Carolina-based bank said today in a memo obtained by Bloomberg. Baronoff, chairman of global M&A, has advised on more than $1 trillion of transactions, including Procter & Gamble Co.’s purchase of Gillette, according to the memo from Thomas Montag, president of global banking and markets, and Michael Rubinoff and Purna Saggurti, co-heads of global investment banking.

Baronoff “will continue to serve as our most senior adviser to deal teams and clients globally,” according to the memo. “We thank Jeff for his dedication and leadership and look forward to working with him in the future.”

Kaplan joins Appaloosa, a Bank of America client, as chief operating officer, according to the memo. As M&A chief, he worked on deals including advising Marvel Entertainment Inc., led by Isaac Perlmutter, on its $4 billion sale to Walt Disney Co. in 2009.

John Yiannacopoulos, a Bank of America spokesman, confirmed the contents of the memo. The change was reported earlier by the Wall Street Journal.

– With assistance from Zachary Mider in New York. Editors: Dan Reichl, David Scheer

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net.

Wing Chau Sues Author of the Big Short!

Tuesday, March 1st, 2011

People have no SHAME.  Wing Chau, president of Harding Advisory is suing Michael Lewis, the author of The Big Short for “unfairly casting him as a villain.”  Listen Wing, you cheated investors and blatantly ignored your fiduciary responsibility.  Give it a break.

In his book, Lewis writes about a handful of Wall Street outsiders who realized the subprime mortgage business was a house of cards and found a way to bet against it, making billions for themselves.  He also discusses the perpetrators and poor underwriters that were the cause of the subprime collapse:

“Author Michael Lewis was sued by Wing Chau, president and principal of Harding Advisory LLC, who accused the writer of defaming him in his 2010 book “The Big Short: Inside the Doomsday Machine.”

Chau, a manager of collateralized debt obligations, according to a complaint filed Feb. 25 in NY federal court, claims the book unfairly casts him as one of the “villains” responsible for the 2008 financial collapse.

The book “depicts Mr. Chau as someone who ignored his professional responsibilities, made misrepresentations to investors, charged money for work that was not performed, had no stake in the CDOs he managed, was incompetent or reckless in carrying out his responsibilities, and violated his fiduciary duties by putting the interests of ‘Wall Street bond trading desks’ above those of his investors,” according to the complaint.

Also named in the suit, which seeks unspecified damages, are the book’s publisher, W.W. Norton and Steven Eisman, managing director of FrontPoint Partners LLC, whom Chau describes in the complaint as “one of the principal sources Lewis relied on in writing ‘The Big Short.’”

Lewis, a columnist for Bloomberg News, didn’t immediately respond to an e-mail seeking comment on the suit. Norton spokeswoman Elizabeth Riley had no immediate comment

The case is Chau v. Lewis, 11-cv-1333, U.S. District Court, Southern District of (Manhattan).”

To contact the reporter on this story: Bob Van Voris in New York.

Complaint Against Michael Lewis

Greenstone Value Opportunity Fund, LP 2010 Annual Letter (Distressed, Deep Value Fund)

Friday, February 25th, 2011

After closing three strong years of performance (2008 – 2.5%, 2009 – 36.5%, 2010 – 15.6%), Greenstone shares its outlook for 2011, as the year of “dividend chasing.”  2010 was certainly a year of “credit chasing,” where all funds searched for yield in high yield bonds, leveraged loans, and REITs.  About 80% of the Greenstone portfolio is investing in traditional deep value securities, and 20% is invested in “special situations.”  The last bullet point in Greenstone’s themes is that historically, “economies with the highest growth produce the lowest stock returns by an immense margin (yes, you read that right). In fact, stocks in countries with the highest economic growth have earned an annual average return of 6%; those in the slowest-growing nations have gained an average of 12% annually (source: Credit Suisse Global Returns Yearbook). This could be especially true in 2011, where equity investors in emerging markets are fighting policymakers.”

Here are Greenstone’s selected themes for 2011:

• We still like equities, particularly in the U.S. While they currently seem short-term overbought, and a technical correction is possible, we still see the most value in this area, especially when we consider the alternatives.

• In reviewing our letters from early last year, we talked about 2010 being the “Year of the Yield Chaser” in the credit space. We cut the majority of our credit exposure in Q1 and Q2 of 2010 because of what we thought was limited further upside appreciation potential. We can see 2011 being the “Year of the Dividend Chaser”.
.
• Offshore deepwater drilling is the last bastion for hydrocarbon discovery. We think a lot of “first time” emerging market demand characteristics and higher oil prices will lead to increased deepwater programs by the IOCs and NOCs. We have a handful of positions that give us exposure to this area.
.
• We would consider shorting natural gas companies because of the supply/demand dynamics and high valuations. We could see a scenario where the contrarian call is to go long physical natural gas because 1) it’s unloved and 2) the historical ratio between gas and oil prices is creating the perception that gas might be a buy. However, even with increasing demand for natural gas expected in the U.S. this year, we still have a tremendous overabundance of supply. We’re keeping an eye on high multiple natural gas companies and MLP’s that derive a generous amount of “other income” from hedging programs that are set to roll off.
.
• The M&A space is one that, for various reasons, we see doing well going forward. This primarily derives from the cash reserves on S&P 500 company balance sheets, which are at the highest level in ten years (currently over $1.2 trillion). This is almost 50% more than the $825 billion held in cash in September 2008. Information technology is the leading sector with cash reserves. With a near 0% interest rate environment, how long can companies hold so much cash? VC’s and Private Equity have not had a genuine chance to monetize their portfolios for 2-3 years now, and we believe they will search out the cash rich/public company exit option. We currently have 5+ names in the portfolio that we believe could benefit from such a trend.
.
• This year could finally be the year where companies have the ability to pass through their increased input costs to consumers. This would result in inflation showing up in the U.S., despite what the CPI is saying.
.
• Along with middle of the road valuations, allocation shifts could be a boom for the equity market in 2011. It is interesting to hear people like Byron Wein say that “Institutional portfolios have to have more of their money invested in places like China, India, and Latin America,” essentially saying that developing countries are generating a majority of the world’s growth, and institutional portfolios should have exposure to these markets. Mr. Wein recommends large conventional institutions substantially increase their allocations to hedge funds and emerging markets.
.
• European and municipal debt issues will once again provide buying opportunities when the markets turns south on these worries. With municipal budgets due in early June, expect more movement in and around this time frame. We have taken advantage of market gyrations that these events have previously offered, and would look to do so again.
.
• The dramatic equity rally from the lows at the end of June occurred almost entirely with net outflows from domestic equity funds, and net inflows into domestic fixed income funds. Late in the fourth quarter, this dynamic switched for the first time in a long while, with inflows into equities and outflows from bond funds. If this trend continues, which it appears that it might, even more fuel could be added to the recent stock market rally.
.
• Even in light of the money flows just mentioned, we don’t expect John Q. Public will come charging back into the market any time soon. We are wary, however, about the potential shift of pensions and endowments (who manage John Q. Public’s money) into equity markets. Essentially, there are way too many underperforming endowments (relative to their liabilities), and they may be forced to chase returns in order to meet their obligations.
.
• In contrast to the Byron Wein bullet point above, Elroy Dimson of the London Business School has decades of compelling data from 50+ countries to support the view that high economic growth in emerging markets doesn’t ensure high stock returns. His book, ‘Triumph of the Optimists: 101 Years of Global Investment Returns’, along with several other studies, have underlying evidence that economies with the highest growth produce the lowest stock returns by an immense margin (yes, you read that right). In fact, stocks in countries with the highest economic growth have earned an annual average return of 6%; those in the slowest-growing nations have gained an average of 12% annually (source: Credit Suisse Global Returns Yearbook). This could be especially true in 2011, where equity investors in emerging markets are fighting policymakers (who are trying to cool off overheated economies with monetary policy, etc), while developed markets are receiving tailwinds from policymakers (who are aggressively trying to lift the prices for risk assets). While many are clamoring for additional exposure to emerging markets, we believe the best risk/reward is to continue to find value in developed markets like the United States.

December 2010 (1) Letter from Distressed Debt Investing Blog

Viking Hedge Fund Loses Dris Upitis

Wednesday, February 9th, 2011

Viking Global Investors LP, the Greenwich, Connecticut based hedge fund faces another high level departure only 10 months after Chief Investment Officer David Ott resigned in April 2010. Dris Upitis, one of the four management committee members, recently announced his resignation from Viking. Since Ott stepped down in April, Upitis, along with his colleagues Tom Purcell, Dan Sundheim, and Jim Parsons, have overseen most of the hedge fund’s $10 billion capital. Upitis was promoted to senior portfolio manager last year after working as an analyst at Viking for six years.

Viking, founded in 1999 returned an average of 13% annually. The Viking Long Fund gained 14.5% in 2010, slightly under the S&P 500 Index of U.S. stock, which returned 15%, including dividends.

Dris Upitis, one of four management committee members at hedge fund Viking Global Investors LP, resigned, the second high-level departure in 10 months after Chief Investment Officer David Ott stepped down in April, according to two people with knowledge of the matter.

Upitis and colleagues Tom Purcell, Dan Sundheim and Jim Parsons have overseen most of Viking’s $10 billion in capital since Ott stepped down in April, said the people, who asked not to be identified because the information isn’t public. Clients were notified of Upitis’ resignation in a note last week, the people said.

Upitis was an analyst at Greenwich, Connecticut-based Viking Global for six years before being promoted to senior portfolio manager last year. The firm is run by Andreas Halvorsen, one of the “Tiger Cubs” who helped build Julian Robertson’s Tiger Management LLC into the world’s biggest hedge- fund group in the 1990s.

After losing 4 percent in the first six months of 2010, Viking Global Equities gained 10 percent in the second half of the year after the fund reshuffled the managers, the people said. The long-short fund rose 3.8 percent last year, investors were told in the letter. That trailed the 7 percent increase of the BAIF Hedge Fund Index.

Halvorsen didn’t respond to two telephone messages left with his office seeking comment. A person answering a number listed for Upitis said he no longer works at the firm.

13% a Year

Viking, which Halvorsen founded with Ott and Brian Olson in 1999, returned an average of 13 percent annually in the decade ended Dec. 31, one of the people said. Viking Global Equities lost 1.9 percent in 2008, when the Lehman Brothers Holdings Inc. bankruptcy triggered the global financial crisis, and the fund climbed 20 percent in 2009, the person said.

Halvorsen started a new fund two years ago to focus on buying stocks after selling them short, or betting on price declines, became more risky. The Viking Long Fund began trading in January 2009 after raising about $80 million, the firm said in a regulatory filing. The Viking Long Fund gained 14.5 percent in 2010, one of the people said. The Standard & Poor’s 500 Index of U.S. stocks returned 15 percent, including dividends.

Shumway Closes its Doors…from $70mm to $8bn in 8 Years…and Now it’s No More…

Monday, February 7th, 2011

Chris Shumway announced that in November that he would be stepping down as the chief investment officer of his eponymous fund, Shumway Capital Partners LLC. Shumway’s started his $8 billion hedge fund in 2002 with $70 million. The company has produced average annual returns of 17 percent before fees. Since it’s creation, Shumway’s funds’ average annual performance has beat the S&P 500 Index by 14 percentage points before fees. Shumway had initially planned to continue to oversee the hedge fund when he appointed Tom Wilcox as the sole portfolio manager last year. However, these changes did not rest well among investors, prompting them to ask for $3 billion in redemptions.  Shumway said in an interview that “A key to my investment success has been my ability to invest with a long-term focus,” which he said he’ll be freer to do if he isn’t managing client capital.  The fund will now focus on managing internal money only.

Chris Shumway, who announced he would step down as chief investment officer of his $8 billion Shumway Capital Partners LLC in November, said he’ll return client capital by March 31, according to a letter sent to investors.

Shumway, 45, who started the Greenwich, Connecticut, firm with $70 million in 2002 and has produced average annual returns of 17 percent before fees, will continue to manage money for himself and his employees.

Investors had asked to redeem $3 billion after Shumway told them of his plan to step down. Last year, Shumway appointed Tom Wilcox to be the sole portfolio manager, while saying he would continue to oversee the hedge fund as chief executive officer and chairman of the management committee. He named Wilcox and three other employees as partners at the firm.

“We changed our operating structure and it created a higher sense of risk for our investors and put greater significance on short-term performance of the fund,” Shumway said in an interview. “A key to my investment success has been my ability to invest with a long-term focus,” which he said he’ll be freer to do if he isn’t managing client capital.

Shumway, an alumnus of Julian Robertson’s Tiger Management LLC, trades stocks worldwide. Shumway’s three funds returned about 2 percent last year. Since inception, the funds’ average annual performance beat the Standard & Poor’s 500 Index by 14 percentage points, before fees, according to the letter. The funds returned 3 percent before fees from October 2007 to March 2009, when the S&P 500 fell about 57 percent, the firm said.

Shumway has 95 employees, including 25 investment professionals. A number of Shumway’s alumni have opened funds in recent years, and Shumway expects other employees to start their own investment firms.

A leveraged-buyout fund run by Goldman Sachs Group Inc. bought an 8 percent stake in Shumway in January 2010.

Harvard Days

Shumway started investing when he was in Harvard Business School, where he earned a master’s in business administration after getting an undergraduate degree from the University of Virginia.

“It was really fun finding the gems and doing the research,” including flying to visit corporate managements, he said.

As chief investment officer, Wilcox would have been responsible for day-to-day management of the portfolio, while Shumway had planned to become a “super analyst” who would focus on finding a few, highly profitable investment ideas each year. He had also planned to manage risk and analyze macroeconomic trends.

“That’s how I started in this business,” he said. “I’m going back to that.”

Paulson Proves He is Not “One Hit Wonder,” Pulls in $1.25 billion for 2010

Sunday, January 2nd, 2011

 

After being bashed by many hedge fund managers as a “one hit wonder,” Paulson closed well in 2010, putting another strong year under his belt.  The Paulson Advantage Fund was up 14% at the end of 2010 (after being down more than 10% earlier).  His largest stakes were in Hartford Financial Services, MGM, and Boston Scientific.  The Paulson Gold Fund also performed well, given the runup in physical commodities this year.  After outperforming many of his competitors, it is rumored that the hedge fund manager will earn $1.25 billion for himself this year.  It is also interesting to see the divergence in HF manager earnings in the U.S. versus the U.K…

According to Daily News UK, “multi-billionaire US hedge fund manager John Paulson, who pulled off one of the biggest coups in Wall Street history when he made £2.3bn by betting against the sub-prime housing market, is showing the Midas touch again writes Edward Helmore from New York. 

Initial reports suggest his firm, Paulson & Co, has made returns of nearly treble the industry average of 7 per cent in 2010, giving him a personal gain estimated at more than £800mm ($1.25 billion). 

That would eclipse even the biggest earners on the UK hedge fund scene, based in London’s swish Mayfair district.

Colm O’Shea of fund group Comac is reported to have made nearly £10mm last year as did Jonathan Ruffer, of the eponymous investment company. 

Crispin Odey, founder of Odey Asset Management took home £36.4mm. ”

According to Dealbook, “two years after Mr. Paulson pulled off one of the greatest trades in Wall Street history, with a winning bet against the overheated mortgage market, he has managed to salvage a poor year for his giant hedge fund with a remarkable come-from-behind showing.

Defying those who said his subprime success was an anomaly, Mr. Paulson appears to have scored big on bets he made on companies that would benefit from an economic rebound.

In less than three months, his flagship fund, the Paulson Advantage Fund, has turned a double-digit loss into a double-digit gain. At mid-December, the fund, which was worth $9 billion at the start of the year, was up about 14 percent, according to one investor in the fund who provided confidential figures on the condition of anonymity.

It is a remarkable turnabout for Mr. Paulson, whose winning gamble against the housing market plucked him from obscurity and transformed him into one of the most celebrated money managers in the business.

What precisely propelled the sharp rebound in Mr. Paulson’s hedge fund is unclear. A spokesman for Paulson & Company declined to comment, and regulatory filings of significant changes made to Mr. Paulson’s funds typically lag behind by several weeks.

But it is clear that several of Mr. Paulson’s largest stakes — in Hartford Financial Services, MGM Resorts and Boston Scientific — went on a tear in the final quarter of the year, with gains of 16 percent, 30 percent and 26 percent, respectively.

“Several of his general investment themes this year came to fruition,” the investor in the Paulson Advantage Fund said.

Mr. Paulson stands out in what may go down as a lukewarm year for many hedge fund managers. The average return for funds through the end of November was 7.1 percent after fees, according to a composite index tracked by Hedge Fund Research of Chicago. Investors would have done better buying a low-cost mutual fund that tracks the Standard & Poor’s 500-stock index, which rose 7.8 percent during that period.

With volatile markets creating uncertainty for hedge fund managers this year, some investors are surprised that these funds did even that well. But they expect the funds to continue to attract money from investors, particularly state pension funds seeking higher returns to offset their budget shortfalls.

“When investors look back at the year they’re going to be pretty happy,” said David T. Shukis, a managing director of hedge fund research and consulting at Cambridge Associates, which oversees $26 billion in hedge fund assets for clients.

But the lackluster performance has other people wondering: are hedge funds worthwhile? The high fees and muted returns — and a long-running federal investigation into insider trading in the industry — has cast a cloud over a business that long defined Wall Street wealth.

“A client told me the other day that paying these ridiculous fees for single-digit returns, then worrying about these investigations — it’s just not worth it,” said Bradley H. Alford, chief investment officer at Alpha Capital Management, which invests in hedge funds. “A lot of these things you can sweep under the rug when there are double-digit returns, but in this environment it’s tougher.”

This year, bets by hedge fund managers were whipsawed by the stock market “flash crash” in May; the European debt crisis; frustration with the Obama administration over what many in the business viewed as anti-Wall Street rhetoric; and the Federal Reserve’s unusual strategy of buying bonds in the open market to hold down interest rates.

“It was an interesting year where you had to have a couple of gut checks,” said David Tepper, founder of Appaloosa Management, whose Palomino fund, which invests largely in distressed debt, was up nearly 21 percent at the end of October, according to data from HSBC Private Bank.

“If you had those gut checks, looked around and made the right decisions, you could make some money,” Mr. Tepper added.

There are still many hurdles for the industry to clear, including the insider trading investigation, lingering difficulty in raising money, and the liquidity demands from investors still fuming over lockups in 2008 that denied them access to their cash.

Some hedge fund notables will probably remember 2010 as a year they would like to write off. For instance, Harbinger Capital, run by Philip A. Falcone, was down 13.8 percent at the end of November, according to HSBC’s data.

But the Third Point Offshore fund, run by Dan Loeb, was up 25 percent for the year through November after it made successful bets on one of Europe’s largest media operators, ProSieben, and Anadarko Petroleum, according to a report obtained from an investor in the fund.

Other big names also fared well. SAC Capital Advisors, run by Steven A. Cohen, was up about 13 percent in its flagship fund, one of his investors said.

A handful of other usual suspects turned out solid performances this year too, according to investors in their funds: David Einhorn notched a 10.5 percent return at his Greenlight Capital hedge fund through November, raising the fund’s total to $6.8 billion.

And after two consecutive years of losses, James Simons, the seer of quantitative hedge funds, was up 17 percent in his two public Renaissance funds, which now collectively manage $7 billion.

The figures reflect performance after fees through November, and do not take into account the strong market rally in the final month of the year, some investors noted.

For many, being in the right sectors of the market — distressed debt and emerging markets, for instance — paid off handsomely.

“If you look at how some of the distressed managers performed, you’re seeing some really good returns among a number of funds,” said David Bailin, global head of managed investments at Citi Private Bank.

Bets on distressed debt produced a return of more than 19 percent as of the end of October for the Monarch Debt Recovery Fund, overseen by a pair of former Lazard managers. Similarly, Pershing Square, a fund run by William A. Ackman, was up 27 percent after fees through the end of November.

Mr. Ackman’s big win was a bet on the debt of General Growth Properties, a developer that emerged from bankruptcy last month.

It was a bumpy year for Mr. Paulson who, besides making a huge bet on gold — which rose 30 percent — also took large stakes in several companies he believed would benefit from a sharp recovery in the economy, including banking and financial services companies.

But as the economic recovery sputtered along, Mr. Paulson’s portfolio sank, prompting some critics to claim that his funds had become too big to manage. Some of Mr. Paulson’s investors asked for their money back around midyear.

At one point this summer, in fact, other hedge fund managers were selling short stocks Mr. Paulson held in his funds, betting that redemption requests would flood in and that he would be forced to sell down some of his big positions, according to a hedge fund trader at another firm who declined to be named for fear of damaging business relationships. He said investors were making similar bets against stocks held by Mr. Falcone’s Harbinger fund.

As recently as the end of September, Mr. Paulson’s flagship Advantage Plus fund was down 11 percent. As of last week, the fund was up more than 14 percent for the year. (His clients are mostly institutions that invest a minimum of $10 million in the fund.)

Patience paid off for Mr. Paulson as many bets he made late last year and early this year finally shot higher in the last quarter.

This year, Mr. Paulson bought 43 million shares of the gambling company MGM, whose shares have soared more than 30 percent since the end of September. A bet of 40 million shares in the cable giant Comcast has risen 22 percent this quarter.

Shares of Boston Scientific, of which Mr. Paulson owns 80 million shares, have skyrocketed 26 percent, and his 44 million shares of Hartford Financial Services climbed 16 percent in the quarter.

One of Mr. Paulson’s newer positions, a stake in Anadarko Petroleum, moved up 20 percent in the quarter.

With the last-minute rally, Mr. Paulson saved himself from being the headliner among flat funds this year. Most were not so fortunate, with many hedging against their stakes late in the year, expecting that stocks would end the year down. That move, some say, probably limited their gains.

“Psychology is such a fragile thing,” said William C. Crerend, the chief executive of EACM Advisors, which oversees a $3.6 billion fund for Bank of New York Mellon.”

David Tepper Personally Earns $4 Billion for 2009 Performance

Sunday, December 26th, 2010

We thank Dan for his contribution to Leverage Academy, LLC and for writing this biography on David Tepper, of Appaloosa, who made $4 billion for himself last year.

David Tepper grew up in a middle class neighborhood in Pittsburgh, PA. He became interested in the stock market after observing his dad, an accountant, trade stocks during the day.  Following high school, he enrolled in the University of Pittsburgh, where he excelled. After Tepper graduated with a degree in economics, he found a job with Equibank as a credit analyst. He quickly became bored with the role and enrolled in the MBA program at Carnegie Mellon’s School of Business, now named after him. [1] Tepper’s experience at Carnegie Mellon helped him learn options theory at a time when there were no textbooks written on the subject. Kenn Dunn, the Dean of school of the school himself taught these option courses.[2]

After graduating, Tepper worked in the Treasury division at Republic Steel, once the third largest steel manufacturer in the U.S.  Soon after, Tepper moved onto Keystone Mutual Funds, and finally to Goldman Sachs.  At Goldman, Tepper focused on his original role as a credit analyst.  However, six months later, he became the head trader on the high yield bond desk!  Despite his successes, Tepper was not promoted to partner due to his disregard for office politics.  After eight years at Goldman, he left and started Appaloosa Management in 1992 with Jack Walton, another Goldman Sachs trader.

With his background in bankruptcies and special situations at Goldman, Tepper applied his skills and experience at the new hedge fund, and it worked out tremendously for him. Tepper is categorized as a distressed debt investor, but he really analyzes and invests in the entire capital structure of distressed companies, from senior secured debt to sub-debt and post-bankruptcy equity. His fund has averaged a 30% average return since 1993!  While that number is particularly high, Appaloosa has fairly volatile historical returns.  In 2008, Tepper’s fund was down around 25% for the year. For the investor that stuck with him, this certainly paid off with a 120% return after fees in 2009. [3] Tepper shies away from the typical glitz and glamour of the ostentatious hedge fund industry. Appaloosa is not based in New York, but in a small office in Chatham, NJ. It is only about 15 minutes from his house so he can spend more time with his family. The firm manages around $12 billion.

Tepper’s astronomical returns resulted from huge bets on the banking industry, specifically Bank of America (BAC) and Citibank (C). He bought BAC around $3.72 and Citi near $0.79. At year’s end, BAC ended at $15.06, a 305% return, and Citi ended at $3.31, a 319% return.  Appaloosa also has invested in other financial companies such as Wells Fargo (WFC), Suntrust (STI), and Royal Bank of Scotland (RBS). Other companies Tepper has investments in are Rite Aid (RAD) , Office Depot (ODP), Good Year Tire and Rubber (GT), OfficeMax (OMX), and Microsoft (MSFT).  He believes that valuations on stocks and bonds in the financial industry remain favorable, and he is now investing in commercial real estate, a place where many analysts expect huge losses.[4]

Tepper’s investment strategy involves finding value in these distressed companies and betting big. He is not very diversified in his holdings compared to most hedge funds. Investing in these distressed companies can be a very lonely business. David Tepper stated about his recent purchases of BAC and Citi, “I felt like I was alone. No one was even bidding.” While some don’t like being alone, Tepper’s contrarian approach helped him scoop up these companies at bargain prices. Tepper reminds himself that he needs a contrarian attitude every day when he walks into his office and sees a pair of brass balls on his desk, literally. “Mr. Tepper keeps a brass replica of a pair of testicles in a prominent spot on his desk, a present from former employees. He rubs the gift for luck during the trading day to get a laugh out of colleagues.”[5] While humorous, these brass balls represent his strategy of taking concentrated bets on these companies that the market does not see any value in.

David Tepper has not been without controversy. In his dealings with Delphi, an auto parts maker, his hedge fund along with other investors backed out of their exit financing agreement after Delphi sought additional funding from General Motors. His hedge fund believed accepting money from an automaker would hurt Delphi’s ability to win contracts with other automakers. The hedge fund also claimed that this funding arrangement broke their financing agreement. Delphi, in turn sued, declaring that the issue was a “story of betrayal and mistrust.” [6] It has since gone into Chapter 11 reorganization.

While most hedge fund managers who have made $4 billion in a year during one of the worst recessions since the 1930s would face scrutiny from the press, public, and government, Tepper has largely gone unscathed due to the lack of glitz and glamour of his lifestyle. Tepper lives in a New Jersey suburb in the same house that he bought in the early 1990s and coaches his kids’ sports teams. He is a family man is proud of raising three good children. He says, “It was much easier when they were younger. It’s harder now when they open the paper and see how much money I make.”[7]

Last year, Tepper told the business school magazine at Carnegie Mellon that money should be a secondary goal, while living an upstanding life and pursuing what you enjoy should be the top priority.[8] Tepper does not forget about his roots either. He regularly goes to Pittsburgh to visit his alma mater and to watch the Pittsburgh Steelers (of which he is now a part owner).  He also donates money to food pantries and other charities around Pittsburgh.[9] Tepper comes to Carnegie Mellon frequently to talk to students about what needs to be improved at the school. Students describe him as down to earth, friendly, and very candid. While he has been an extremely successful hedge fund manager, he does not lead an extravagant lifestyle and continues to deliver excellent results to investors. His philosophy is very simple: if you treat people right, run your business right, and run your life right, you will create a sustainable business.


[1] http://web.tepper.cmu.edu/tepper/about.aspx

[2] http://www.americanwaymag.com/carnegie-mellon-appaloosa-management-david-a-tepper-school-of-business-coo-and-president

[3] http://seekingalpha.com/article/179565-2009-s-billion-dollar-man-david-tepper

[4] ibid

[5] http://nymag.com/daily/intel/2009/12/david_tepper_made_7_billion_do.html

[6] http://dealbook.blogs.nytimes.com/2009/07/09/appaloosa-and-icahn-said-to-mull-bids-for-delphi/#more-85819

[7] http://www.tepper.cmu.edu/news-multimedia/tepper-stories/david-tepper/index.aspx

[8] http://www.independent.co.uk/news/world/americas/25bn-pay-packet-for-fund-manager-1847227.html

[9] http://www.pittsburghlive.com/x/pittsburghtrib/business/s_658849.html

2010 Top 10 Highest Earning Hedge Fund Managers
Rank Name Firm Name 2009 Earnings
1 David Tepper Appaloosa Management $4 billion
2 George Soros Soros Fund Management $3.3 billion
3 James Simons Renaissance Technologies $2.5 billion
4 John Paulson Paulson & Co. $2.3 billion
5 Steve Cohen SAC Capital Advisors $1.4 billion
6 Carl Icahn Icahn Capital $1.3 billion
7 Edward Lampert ESL Investments $1.3 billion
8 Kenneth Griffin Citadel Investment Group $900 million
9 John Arnold Centaurus Advisors $900 million
10 Philip Falcone Harbinger Capital Partners $825 million

.

Check out our intensive investment banking, private equity, and sales & trading courses! The discount code Merger34299 will be activated until April 15, 2011. Questions? Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.