| Seth Klarman, Baupost Group (Bloomberg) |
Boston-based hedge fund giant Baupost Group recently told investors it will not return capital to them at the end of 2014, as it did the previous year. However, it said there is a good chance it will distribute some money to them at the end of this year. In the firm’s third-quarter letter to clients, Baupost said there is a “likely possibility” that it will give back money to investors in 2015, according to people who saw the letter. In a past letter to clients, Baupost chief Seth Klarman explained that the goal in periodically returning capital was “to better match our assets under management with the opportunity set we see for new investments.” In December 2013 we reported that Baupost planned to give investors back some $4 billion at the end of that year.
That was only the second time in the firm’s history that it returned money to investors. The previous time was in 2010, and Baupost subsequently raised money in early 2011.
In the third-quarter 2014 letter, Baupost told clients that cash balances were about 39 percent, according to those who have seen the letter. Baupost followers know this is closer to the lower end of the typical range of cash that Baupost typically holds. Over the years, it has averaged 33 percent of assets in cash, and its cash balance can reach as high as 50 percent.
Baupost reportedly told investors that it continues to find attractive investments. Investors often mischaracterize the firm that Harvard Business School alumnus Klarman helped to found as simply a value investor. It is actually a more eclectic investor that seeks undervalued, ignored, often complex assets, mostly among distressed debt, commercial real estate, mortgages and equities. The firm’s flagship fund returned 9 percent in the first half of the year. It could not be learned how the fund performed in the third quarter, as this information did not appear in the letter.
Although equities historically played a nominal role at the firm, we earlier reported that in the second quarter of 2014, Baupost’s U.S. stock portfolio swelled to $6.14 billion, by far the firm’s largest equity exposure since it was founded in 1982. In the third quarter Baupost trimmed this portfolio to $5.74 billion.
Altogether, Baupost had $26.8 billion under management at the beginning of 2014, appearing at No. 11 on Alpha’s annual ranking of the world’s 100 largest hedge fund firms. It ranked seventh the prior year, when it managed $26.7 billion.
Baupost declined to comment on its most recent letter.
