Paul Singer’s Elliott Associates is saving up for the next rainy day. The New York multistrategy hedge fund firm, which has $22 billion under management in its two main funds, Elliott Associates and Elliott International, told investors in its July 26 quarterly letter that it is tinkering with its fund raising plans.
Unlike most hedge funds, Elliott, whose main funds were up around 5.2 percent to 5.3 percent in the first half of the year, does not take possession of the capital once an investor commits to an investment with the firm. It waits until it actually needs the money to make a specific investment. This practice, known as a capital commitment, is more common with private equity funds. (When managers withdraw these funds, it is known as a capital call.) Elliott, which has raised four capital commitments, is now raising funds for a fifth capital commitment and is allowing participants in its fourth commitment to extend their uncalled capital. The firm is raising the money for future investment opportunities, which it expects will arise during the next market correction.
Elliott said it is in the early stages of offering to existing participants in its fourth capital commitment the option of extending their uncalled commitments to January 1, 2016, and offering a fifth capital commitment. The firm expects to have some $3.77 billion, between the two commitments, at its disposal through January 2016.
“The idea is to make sure Elliott has sufficient ‘dry powder’ for the next set of exceptional opportunities,” the firm told clients. It figures these opportunities will emerge “in some period of future market turmoil.
“The question of the optimal (or maximum) size of Elliott…is determined by the size of the markets in which we are trading and the pricing aberrations in those markets, which at times can be very significant and available in large size,” it explained in the letter. “We want to be ready.”
Elliott originally closed on its fourth commitment in November 2011 and February 2012. It already called about $2 billion, leaving it with $1.77 billion uncalled. So the fifth commitment, in effect, will include that remaining $1.77 billion and an additional $2 billion that it recently raised, according to a published report.
According to a knowledgeable source, the extension basically is a way of telling investors the firm will take a much longer waiting time until it needs the money. Indeed, in the second quarter report, Elliott makes it clear it is not too confident about the near-term prospects for most of the global markets, emphasizing its goal of capital preservation and “staying out of trouble.”
For example, it disputes “most economists” who believe growth in the U.S. economy will accelerate in the second half of 2013 and “gather more steam in 2014,” and that Europe may be close to bottoming out. “Our guess is that a meaningful upturn of growth in the U.S. and Europe is unlikely, given the current mix of fiscal and economic policies in these regions,” Elliott asserted in the letter. “We are not likely to see a meaningful pickup in growth for the rest of 2013, into at least 2014.”
And while it acknowledged that Japan is showing signs that it is in the early stages of a recovery, a cynical Elliott called this prospect “novel,” adding, “There have been several false starts to Japanese growth since the peak of its speculative bubble in 1990.”
This said, Elliott conceded that Japan has the highest likelihood of experiencing an expansion, “primarily due to the passionate dedication of that country’s new leadership to breaking the bonds of the last twenty years of economic underperformance.” Elliott even stated that there could be a good deal of upside if Japanese growth catches fire.
“In contrast, Europe seems to be on a slow, continuous muddle-through,” Elliott added.
As for the U.S., Elliott belittled the notion that it is undergoing what people are calling data lift, asserting that much of the data is “cooked.” As result, not only does the firm doubt growth will accelerate in the U.S., it thinks there may be a fallback.
This does not mean there are no opportunities to invest in right now. Elliott noted, for example, that as the most recent quarter wound down, a number of relationships and correlations got sufficiently out of line. So it put on a variety of positions within its style, including some relative value trades in structured products, volatility and interest rates.
“We continue to see a regular flow of real estate situations in Japan, the U.K. and (to a lesser degree) the U.S.,” it added.
In addition, the firm said it is pursuing some opportunities in event arbitrage, as well as several potential activist equity situations “that could prove to be interesting.”
In general, Elliott explained, during periods of complacency and overpricing, the goal is to create portfolio defenses and try to make some money without stretching parameters. “It is not thrilling to make single-digit rates of return, but at times that result may be all that we can achieve under the circumstances,” it added.
“We have found that the key to managing money for long-term stability and capital appreciation is the ability to shape positions and hedges in the complacent periods that maintain and consistently apply the discipline and risk parameters that we’ve developed and refined over the years,” Elliott further explained.
If this is executed properly, Elliott is confident it will not lose too much money “in the surprising crisis periods” that may ensue. “Perhaps more important, however, is that we expect to retain both the purchasing power and the decision-making confidence to take advantage of the special opportunities that are the natural byproduct of market turmoil,” it added. “Such periods are instrumental in creating the overall capital-growth profile that we are seeking for the portfolio.”
And that is what the dry powder will be used for in a few years.
