The Baupost Group is one of the world’s biggest hedge funds; at $23.4 billion, it is ranked eleventh. It is also one of the most private. The man behind the mask is Seth Klarman, who joined Baupost Group in 1982, fresh out of Harvard Business School, and has been managing its hedge fund since. Klarman bases his ideology on a simple tenet to only invest when the asset is undervalued. The idea is to create the highest margin possible between the sale price and the value of the asset, ideally purchasing assets for less than or equal to the liquidation value. Ironically, he even wrote a book on the subject, Margin of Safety, which, while only printed once, has become enough of a cult collectible to garner as much as $2,000 in auction.
Thanks largely to Klarman’s sensibilities, most of the holdings in the Baupost Group’s hedge fund are not big names; they are small and mid-cap companies that Klarman believes will break out soon. Klarman’s method may seem risky, but his returns speak for themselves. Since its inception, the Baupost Group has outperformed the S&P 500 by over 10%. In other words, Klarman isn’t conservative necessarily; he is calculating (in the best, most profitable way).
During the first quarter, Klarman opted to sell out of Regeneron Pharmaceuticals (REGN). Regeneron’s stock swelled after an FDA advisory panel voted 10-0 that its newest drug, Eylea, should be considered for FDA approval. (See the details.) The infamous hedge fund manager Carl Icahn also went the Regeneron route; however, Icahn didn’t sell his holdings and gained 28% on his Regeneron investment (check out Icahn’s stock picks).
CompanyName | Ticker | Value | Activity | Return |
REGENERON PHARMACEUTICALS | REGN |
| Sold Out | 28% |
CAPITALSOURCE INC | 73568 | -35% | -9% | |
BREITBURN ENERGY PARTNERS | 65646 | -31% | -6% | |
ITURAN LOCATION & CONTROL | 25285 | -2% | -4% | |
ENZON PHARMACEUTICALS | 98110 | -1% | -6% | |
ALERE INC | 121334 | 0% | -8% | |
ALLIANCE ONE INTERNATIONAL | 35323 | 0% | -17% | |
AUDIOVOX CORP | 8485 | 0% | -4% | |
MULTIMEDIA GAMES INC | 14898 | 0% | -18% | |
NEWS CORP | 334899 | 0% | -7% | |
THERAVANCE INC | 314860 | 0% | 2% | |
THERAVANCE INC (Bond) | THRX | 58076 | 0% | 2% |
VIASAT INC | 400451 | 0% | 15% | |
SYNERON MEDICAL LTD | 19560 | 0% | -5% | |
A V E O PHARMACEUTICALS | 46953 | 76% | 47% | |
P D L BIOPHARMA INC | 60872 | 87% | 12% | |
ALLIED NEVADA GOLD CORP | 87153 | New | 15% | |
SYCAMORE NETWORKS INC | SCMR | 2443 | New | -14% |
Overall, Klarman’s stock picks returned 3% since the end of first quarter, vs. 2% return for the SPY. Klarman is worried about the current economic environment and recently warned his investors that a second recession is likely (see the details of Klarman’s warning). He initiated a brand new position in Allied Nevada Gold during the first quarter. The stock gained 15% since the end of March. Chuck Royce had more than $300 million in ANV at the end of March as well.
Klarman re-upped the fund’s holdings in biotech, nearly doubling the value of its AVEO Pharmaceuticals and PDL Biopharma holdings. AVEO gained 47% and PDLI returned 12% since the end of first quarter. Klarman sold 35% of the Baupost Group hedge fund’s investment in CapitalSource. The stock lost 9% since the end of March. Klarman also opted to further reduce Baupost’s position in Breitburn Energy Partners by 31%, a move that is becoming somewhat of a trend for him. This was also a timely sale. BBEP lost 6% since the end of March, underperforming the market by 8 percentage points.
We like Klarman’s stock picks and he is one of the hedge fund managers we follow very closely. His stock picks are usually very conservative and manage to beat the market. Investors who imitated his stock picks could have beaten the market by a percentage point during the past 3.5 months as well. We will keep you posted on Klarman’s portfolio activity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
