Elliott Letter Reports Positive Quarter, Lays Out Portfolio

	Paul Singer, Elliott Management

Paul Singer’s two main hedge funds — Elliott Associates and Elliott International — posted gains of 2 percent and 1.8 percent, respectively, in the second quarter, bringing gains for the first six months to 4.6 percent and 4.1 percent, respectively. The New York multistrategy hedge fund firm said in its second-quarter letter obtained by Alpha that it made money last quarter from distressed securities, performing debt, equity-oriented trades, commodities trading, event arbitrage and portfolio-protection trades related to interest rates.

The hedge fund firm lost money from portfolio-protection trades related to credit and equities.

In a detailed addendum to its second-quarter report obtained by Alpha, Elliott provided a rundown of where its portfolio is currently positioned and offered an interesting view into how diversely its portfolio spans.

Of course, among distressed securities, Elliott is still locked in a major litigation with the Argentinean government over its defaulted bonds from 2001, a case that has made its way through the U.S. courts. Argentina was ordered to pay Elliott and the other creditors by June 30. Thursday is the deadline for the grace period.

In addition, Elliott is a longtime holder of Lehman Brothers.

For example, it holds senior claims in Lehman Brothers International Europe (LBIE), the UK broker-dealer affiliate of Lehman Brothers Holdings (LBHI). Elliott pointed out that at the end of April, LBIE made a distribution that brought the cumulative distributions to 100 percent. “Elliott has a significant interest in LBIE through its holdings of senior claims and its participation in the joint venture with King Street Capital Management, LBHI and LB Holdings Intermediate 2 (LBHI2),” it reminded clients in the letter.

Elliott also pointed out that it is a creditor of Lehman Brothers Finance, the Swiss Lehman affiliate, which also announced and paid a distribution that brings total distributions to 47.9 percent of the claim.

The hedge fund firm also has a number of positions in nonperforming loans (NPLs), including Lehman Brothers, an unnamed leisure and hospitality company, collateralized loan obligation tranches, and Argentinean and European NPLs.

In the performing debt market, Elliott said it has been “actively trading” its residential mortgage-backed securities (RMBS) portfolio as interest rates fluctuate. Meanwhile, the report said, “The CMBS [commercial mortgage-backed] market continued to rally through the second quarter, and post-crisis bonds outperformed legacy bonds issued before the financial crisis,” it told clients.

Elliott also said existing positions in whole loan mortgages “have continued to exceed expectations.” Its largest positions: UK residential mortgages, CMBS tranches, a private UK real estate situation, a European power plant and a UK structured real estate situation, according to the report.

In the commercial real estate securities market, Elliott reported that it is “net sellers of stabilized and ‘conventional’ commercial real estate,” instead investing in what it calls “more complex and opportunistic situations,” aligning with experienced managers. “We continue to seek additional subordinated debt opportunities, sometimes in the form of preferred equity with upside participation,” it added.

Last quarter Elliott sold a luxury hotel property in the Italian Alps, which it acquired in late 2011. “After a default and repossession by the lender, the property sat empty for a number of years until our purchase from that bank,” the letter explained, adding that the property was acquired at a 65 percent discount to replacement cost.

Elliott also detailed three U.S.-based stock positions.

These include its activist stake in EMC Corp., the data storage giant that is also a majority owner of VMware, which specializes in virtualization software for data centers. “Elliott is looking forward to a dialogue with EMC to discuss ways to create additional value for shareholders,” it stated in the report.

Elliott also recently added to its stake in Juniper Networks, whose shares fell after the company announced a plan to boost its stock back in February. “We continue to believe that Juniper has numerous pathways for value maximization,” Elliott told clients.

Elliott also noted that last quarter it sold a piece of its investment in the initial public offering of UK video game retailer Game Digital, the former Game Group. “We acquired the company . . . when it went into bankruptcy two years ago,” the firm noted. While the company was in bankruptcy, Elliott made an acquisition and restructured the company. “Game’s return to the public stock market is a major step, and we expect the company to do well in the next few years,” it added.

Elliott also made some money from the commodity markets, mostly from trades in UK natural gas and metals.

On the other hand, it said currency trades “went sideways.”

Elliott also owns gold, stressing that it “does so in a way that minimizes cost and risk if we are wrong, but maximizes exposure if it starts going our way.”