Eton Park Loads Up on Options

by: Market Folly

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

Next up is Eric Mindich's hedge fund firm, Eton Park Capital. Mindich started the fund back in 2004 with $3 billion under management with a $5 million minimum investment. Nowadays, Eton Park manages over $6 billion. The fund's investment strategy draws upon Mindich's time at Goldman Sachs where he focused on merger arbitrage. He was so good at his job that he became the youngest partner in Goldman Sachs' history at the age of 27. In addition to merger arbitrage, Eton Park focuses on long/short equity strategies and even invests up to 30% of its portfolio into private investments.

Eton Park's solid track record has landed it in our Market Folly portfolio where we seek to replicate hedge fund holdings into a cohesive portfolio.

Let's take a look at its portfolio.

The following were Eton Park's long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some New Positions (Brand new positions that Eton Park initiated in the last quarter):
US Steel (NYSE:X) Puts, Pfizer (NYSE:PFE) Calls, Caterpillar (NYSE:CAT) Puts, Deere (NYSE:DE) Puts, CF Industries (NYSE:CF), General Electric (NYSE:GE) Puts, Liberty Media (LMDIA), ML Retail Holdrs (NYSEARCA:RTH) Puts, Comcast (CMCSK) Calls, SPDR Retail (NYSEARCA:XRT) Puts, Materials SPDR (NYSEARCA:XLB) Puts, Pepsi Bottling Group (PBG), Deere (DE) Calls, Data Domain (DDUP), iShares Brazil (NYSEARCA:EWZ) Calls, Verisign (NASDAQ:VRSN) Puts, Netapp (NASDAQ:NTAP) Calls, Vale (NYSE:VALE) Calls, Emulex (NYSE:ELX), and PepsiAmericas (PAS).

Some Increased Positions (A few positions Eton Park already owned but added shares to)
iShares Brazil (EWZ): Increased by 327.5%
Wyeth (WYE): Increased by 172.6%
Caterpillar (CAT) Calls: Increased by 148.9%
Schering Plough (SGP): Increased by 129.5%
Comcast (CMCSK): Increased by 77.6%
Amdocs (NYSE:DOX): Increased by 57.8%
Alcoa (NYSE:AA) Calls: Increased by 33.3%
Potash (NYSE:POT) Puts: Increased by 29.5%
Lorillard (NYSE:LO): Increased by 25.67%

Some Reduced Positions (Some positions Eton Park sold some shares of)
Petroleo Brasileiro (NYSE:PBR) Puts: Reduced by 75%
SPDR Gold Trust (NYSEARCA:GLD): Reduced by 68.9%
iShares Brazil (EWZ) Puts: Reduced by 50%
Ebay (NASDAQ:EBAY): Reduced by 46.4%
VimpelComm (NYSE:VIP): Reduced by 42.5%
SPDR Gold Trust (GLD) Calls: Reduced by 36.4%
Goodyear Tire (NYSE:GT): Reduced by 34.8%
iShares Emerging Markets (NYSEARCA:EEM) Puts: Reduced by 32%
Hansen Natural (HANS): Reduced by 21.9%
Wells Fargo (NYSE:WFC) Puts: Reduced by 17.9%

Removed Positions (Positions Eton Park sold out of completely)
SPDR Gold Trust (GLD) Puts, Google (NASDAQ:GOOG), Google (GOOG) Calls, Suncor (NYSE:SU), Grupo Televisa (NYSE:TV), Walter Industries (NYSE:WLT), News Corp (NASDAQ:NWSA), Select Sector Financial (NYSEARCA:XLF) Calls, Lamar Advertising (NASDAQ:LAMR), General Motors (NYSE:GRM), Allergan (NYSE:AGN) Calls, EMC (EMC), Cisco Systems (NASDAQ:CSCO) Calls, News Corp (NASDAQ:NWS), Nokia (NYSE:NOK), and CV Therapeutics (CVTX).

Top 15 Holdings by percentage of long portfolio *(see note below regarding calculations)

  1. SPDR Gold (GLD) Calls: 8.94% of portfolio
  2. Potash (POT) Puts: 8.43% of portfolio
  3. US Steel (X) Puts: 5% of portfolio
  4. iShares Emerging Markets (EEM) Puts: 3.84% of portfolio
  5. iShares Brazil (EWZ) Puts: 3.7% of portfolio
  6. Caterpillar (CAT) Calls: 3.46% of portfolio
  7. Viacom (VIA.B) Calls: 3.2% of portfolio
  8. Pfizer (PFE) Calls: 3.15% of portfolio
  9. Verisign (VRSN): 3.11% of portfolio
  10. Schering Plough (SGP): 2.74% of portfolio
  11. Hospira (NYSE:HSP): 2.56% of portfolio
  12. Caterpillar (CAT) Puts: 2.54% of portfolio
  13. John Deere (DE) Puts: 2.52% of portfolio
  14. Potash (POT) Calls: 2.48% of portfolio
  15. Viacom (VIA-B): 2.46% of portfolio

Eton Park's portfolio is absolutely loaded with options positions. The vast majority of its top holdings are bearish plays as it owns puts on a variety of exchange traded funds (ETFs) and global growth type names. Additionally, its call position on Gold via GLD remains its top holding which is also a cautionary measure (although it did reduce this position by 36.4%). At the same time, Eton Park also sold off a ton of its common shares of GLD and it sold completely out of its GLD puts position.

This highlights a big problem with tracking Eton Park this time around (and most likely going forward as well). Since the fund owns both common shares and (in some cases numerous) options positions on the underlying shares, it is impossible for us to tell what kind of directional bet it truly has on. Complicating the matter even further is the fact that many of Eton Park's options positions have a higher notional value than its common share positions. Additionally, we cannot decipher the strike prices or expiration dates of these options positions Eton Park purchased either. Not to mention, it could have sold options positions against its holdings to hedge what it was buying, which we also cannot see.

All around, this simply means you need to take the data presented above with a giant grain of salt. While many of Eton Park's top holdings are put positions, there's no real way for us to know exactly the extent of its directional bet on some of these holdings once you add in all the other possible variables.

So, instead we will want to focus on the fund's equity holdings as those are easier to track and decipher. The construction of Eton Park's portfolio makes it difficult to clone a portfolio from and as such we will be removing them from our Market Folly clone going forward. Although the performance numbers generated by mimicking Eton Park's equity holdings alone is still outstanding, we feel it is in our best interest to find funds that are more purely focused on equities so that we can track and clone portfolios to the most accurate degree possible. We'll have a separate post detailing the changes to the portfolio soon.

Turning to major activity of note that is easily trackable, we look at Eton Park's stakes of Wyeth (WYE) and Schering Plough (SGP). Eton Park boosted both holdings substantially over the past quarter and this fits right into its risk arbitrage game. But other than that, there wasn't a whole lot of activity that is decipherable enough to mention.

*Note regarding portfolio percentages
: Assets from the collective holdings reported to the SEC via 13F filing were $7.1 billion this quarter compared to $6.2 billion last quarter, so quite a noticeable uptick in assets on the long side. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. In reality, the percentages are more watered down in their actual hedge fund portfolio. If you were to calculate percentage weightings in the actual hedge fund portfolio, they would obviously be different since you would divide position sizes by their total assets under management.

This is just one of the 40+ prominent funds that we'll be covering in our Q2 2009 hedge fund portfolio series. So far, we've already covered the holdings of Bill Ackman's Pershing Square Capital Management, David Einhorn's Greenlight Capital, Seth Klarman's Baupost Group, Dan Loeb's Third Point LLC, and Stephen Mandel's Lone Pine Capital, George Soros (Soros Fund Management), Lee Ainslie's Maverick Capital, Philip Falcone's Harbinger Capital Partners, and David Stemerman's Conatus Capital. Check back each day as we cover prominent hedge fund portfolios.