This is the third quarter 2009 edition of our hedge fund portfolio tracking series. If you're unfamiliar with tracking hedge fund movements or SEC filings, check out our series preface on hedge fund 13F filings.

Next up in our series is Thomas Steyer's hedge fund firm Farallon Capital. Thomas Steyer founded Farallon in 1986 and today it is a multi-billion dollar hedge fund that typically uses risk arbitrage strategies and invests in equities, private investments, debt, and real estate. Previously, Steyer was an analyst for Morgan Stanley in its Mergers & Acquisitions department and also an associate on Goldman Sachs' risk arbitrage desk. Steyer graduated Summa Cum Laude from Yale University and also received his MBA from Stanford's Graduate School of Business. In the past, Farallon was ranked third in Alpha's 2008 hedge fund rankings. In terms of recent portfolio adjustments from Farallon, we saw it was just adding to its Beacon Roofing (BECN) stake. For more recent activity out of Farallon head to our post on its portfolio and internal firm adjustments.

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 Ken Griffin's Citadel Investment Group. Ken got his start trading options from his dorm room at Harvard his freshman year. He then launched a convertible bond arbitrage fund his sophomore year and by his senior year, he had $1 million from investors invested in that strategy. Since then, Citadel has seen average annual returns of around 20%. The year of 2008 was a difficult one for them though, as their flagship Wellington and Kensington funds were down big. In fact, they were among the top 10 hedge fund asset losers. Since they would not be recouping performance fees from those funds for a while it seemed, they did what any sensible hedge fund manager would do: start new funds where they can collect the fee again. This is an endless boom bust cycle we've seen in hedge fund land. If you fail, then just come back with a new entity and you're good to go.

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.

Today we're covering Thomas Steyer's hedge fund Farallon Capital Management. Founded by Steyer in 1986, Farallon employs risk arbitrage strategies. Previously, he was an analyst in Morgan Stanley's (MS) Mergers & Acquisitions department and also an associate on Goldman Sachs' (GS) risk arbitrage desk. Farallon typically invests in equities, debt (public & private), private investments, and real estate. Steyer graduated Summa Cum Laude from Yale University and went on to receive his MBA from Stanford.

At the end of each trading week, our market direction radar scans the Hillbent 3000 universe (minimun average daily volume of 100k and largest 3000 market capitalization stocks) for the top 3 and bottom 3 sectors based upon aggregate performance and analyzes their winners and losers.

Using this weekly sector report on a regular basis allows Hillbent.com’s readers to efficiently monitor sector rotations and investor sentiment biases.

The market experienced broad declines on Monday, hurt by weak economic data - a sharp contrast to last week when the Dow industrials rallied to turn positive for the year, increasing hopes that the economy is starting to turn around. Some key reports issued on Monday helped underscore the fact that the economy is still struggling. At mid-month, a New York state manufacturing survey (which often indicates where the country is headed) showed a decline in orders from just thirty days ago. In addition, more than half of the manufacturing respondents said that they had pared capital spending this year. Adding to the mix, the National Association of Home Builders housing-market index fell in June as higher mortgage rates damped demand. That didn't help set the table for a good week, but we'll see how things play out for the beaten bulls as the week goes on.

In the healthcare sector, Jazz Pharmaceuticals, Inc (NASDAQ:JAZZ), which had a good day last week, is off to another good start. The stock closed up +1.92 (72.73%) to $4.56 after the company's Sodium oxybate or JZP-6 demonstrated statistically significant and clinically meaningful improvement in pain and the core symptoms associated with fibromyalgia, according to Phase III data presented at the 2009 Associated Professional Sleep Societies meeting in Seattle, WA. The company said that these data have not been evaluated by the FDA or other regulatory authorities for use of sodium oxybate in the treatment of fibromyalgia. Assuming positive results for the second study, the company anticipates submitting a New Drug Application for sodium oxybate for the treatment of fibromyalgia to the U.S. Food and Drug Administration by the end of 2009.

At the end of each trading week, Hillbent scans the equity market for potential anomalies which exhibit extremely oversold and overbought conditions. Past observations have revealed that such candidates may experience reversal corrections to the upside or downside once the market reconfirms that their fundamentals remain solidly intact or relatively poor. From a contrarian perspective, these lists may also serve as a precursor to changes in institutional sentiment and underlying fundamentals.

(The purpose of this report is not to provide specific recommendations, but instead serve as a time-saving reference tool and starting point for investment ideas as the upcoming trading week unfolds. Of course, the results generated are not always perfect and users are strongly encouraged to perform their own due diligence on these names. Note that overbought and oversold conditions are based upon proprietary algorithms and quantitative models instead of conventional technical analysis indicators. As a supplement to this report, please refer to our Market Condition Summary to determine if market direction trends support a bullish or bearish investment bias over short-term, intermediate, and long-term timeframes.)

At the end of each trading week, Hillbent scans for the equity market for potential anomalies which exhibit extremely oversold and overbought conditions. Past observations have revealed that such candidates may experience reversal corrections to the upside or downside once the market reconfirms that their fundamentals remain solidly intact or relatively poor. From a contrarian perspective, these lists may also serve as a precursor to changes in institutional sentiment and underlying fundamentals.

(The purpose of this report is not to provide specific recommendations, but instead serve as a time-saving reference tool and starting point for investment ideas as the upcoming trading week unfolds. Of course, the results generated are not always perfect and users are strongly encouraged to perform their own due diligence on these names. Note that overbought and oversold conditions are based upon proprietary algorithms and quantitative models instead of conventional technical analysis indicators. As a supplement to this report, please refer to our Market Condition Summary to determine if market direction trends support a bullish or bearish investment bias over short-term, intermediate, and long-term timeframes.)

The healthcare industry is undergoing a large transformation and the whole landscape has drastically changed in the last few quarters. The distressed markets have created immense opportunities for large cap pharmaceutical and biotechnology companies looking to expand their business by expanding their product lines.

Even though credit is hard to come by, these “cash cow” companies have been able to raise the necessary funds in order to successfully follow through with their acquisition strategy. In the last few months we saw Pfizer (PFE) purchase Wyeth, Merck (MRK) sweep up Schering Plough, Roche (RHHBY.PK) acquire the rest of Genentech, and Gilead Sciences (GILD) acquire CV Therapeutics.

Stocks that have dropped significantly in price and are trading at all time lows provide investors attractive entry points, but some of those stocks could be deceptively “cheap”. Being able to discriminate between the two is a valuable skill for every portfolio manager and stock picker.

In order to identify a good investment opportunity, AFG starts with assessing corporate performance by evaluating the ability of firms to generate Economic Margins above their sector median. Companies with expected improvement in their EMs tend to outperform companies with deteriorating EMs. In addition to corporate performance, AFG evaluates the valuation attractiveness and embedded expectations priced into the market through the Value Expectations interface.

Sentiment

Stocks bounced back from early losses and are trading higher late Wednesday. With no economic data on the calendar, the focus remained on earnings early. The results were mixed, but the financials opened lower after MorganStanley (MS) posted a wider-than-expected loss. Shares of the investment bank traded down more than 7.3 percent in pre-market trading and set the stage for an early decline at the opening bell Wednesday.

However, in a pattern similar to Tuesday, the early decline in the financials was short-lived. After falling to a low of $10.20 per share early, the Select Sector Financials, an exchange-traded fund that holds all of the financial-related stocks from the S&P 500, rallied back up to $10.70, up 10 cents on the day.

Sentiment

Stocks bounced back from early losses and are trading broadly higher late Tuesday. With no economic data on the calendar, the focus was on earnings and the financials early in the trading day. Four Dow components -- Coca Cola (KO), Caterpillar (CAT), DuPont (DD), and Merck (MRK) -- released results before the bell and mixed results failed to stir much movement in stock index futures, which had fallen into the red before the opening bell on Wall Street Tuesday morning.

Concerns about problems in the financial world and volatility in the financial sector after steep losses suffered Monday weighed on sentiment early. After falling 24 percent Monday on worries about losses in its mortgage and credit card businesses, BofA (BAC) was again trading lower in pre-market action Tuesday. Citi (C), which fell 19.5 percent Monday, was also heading southward.

A staggering drop (>50%) today in one of our former holdings Kendle International (KNDL) - this is part of what was supposedly a 'safe' group of stocks, [Aug 13, 2008: Bookkeeping - Creating a CRO Basket] contract research organizations that provide outsourcing lab services for the pharma and biotech industry. If this is a safe sector, I'd hate to see dangerous.

With the lack of credit, there appears to be a lot of struggling in the smaller companies in biotech, and we're seeing a host of cutbacks even in the larger names. With that said, owning stocks is always a mine field and any day you can wake up to find a position down 30,40,50%. To some degree, it takes just plain luck to avoid those situations... it's been a while since I've been hit with one, but it is inevitable.

Kendle (KNDL) is not a name we've talked about much of late - I only had a 0.2% stake and I am going to close it out for a whopping $43 gain. The company reported earnings Wednesday morning and there was a 1x issue that adversely affected results; however, they guided down below analyst estimates for 2009 - more importantly, the chart has taken a turn for the worse.


I keep repeating myself, but this market punishes almost any person who buys breakouts - I feel like a broken record. Two weeks ago, the stock had a beautiful chart... Kendle was breaking out - your training is to buy that chart. If you did, you were hammered (we did not in this case). The few times I've any breakouts I've gotten demolished. It's just not working unless it's gold/silver. There is no trend trading or riding a wave anymore.

Q4 2008 Earnings Call

February 25, 2009; 08:30 am ET

Q3 2008 Earnings Call Transcript

November 5, 2008, 8:30 am ET

For those who are newer readers, my general ethos is avoid stocks around earnings - while many get a kick out of the gambling associated with piling into stocks ahead of earnings hoping for the huge win - I find it a very risky game that has more bad outcomes than good. But the big moves in the small percentage of situations keep luring the gamblers... err investors... back to this (ahem) strategy.

Kendle International (KNDL) reports on the 4th and I am going against my normal rules to add quite a bit of exposure ahead of earnings. We've outlined this week how the contract research organizations have been a total disaster of late [Oct 28: Contract Research Organizations Taken to Woodshed] as there are now worries about both the US dollar and pharma companies trying to save money any way they can - including less outsourcing of research.

Elasticity of demand is a concept that resides at the core of economic fundamentals. Simply stated, elasticity of demand measures customer sensitivity to fluctuations in price. If price adjustments lead to a change in purchasing behavior, demand is considered to be elastic.

Demand sensitivity is a critical factor when evaluating a companies ability to navigate economic volatility, a dynamic that has become particularly relevant within the last year as our economy has muddled through a number of challenging circumstances.

Q2 2008 Earnings Call Transcript

August 6, 2008 9:30 am ET

Q1 2008 Earnings Call

May 7, 2008 9:30 am ET