The Baupost Group is the latest hedge fund firm to disclose that the late-year global financial markets selloff wiped out its profits for the year.
The eclectic investment firm headed by Seth Klarman told clients in its year-end letter that its partnerships finished the year roughly flat to down less than 1 percent, depending on the investor. “Investment profits were negated in a punishing final month,” Klarman stated in the letter.
This is the fifth consecutive year Baupost failed to post double-digit gains, a feat it has accomplished only once since 2010. Baupost started 2019 with $27 billion under management, down from $29.5 billion a year ago.
Klarman recently made news when other passages of the year-end letter became the talk of the World Economic Forum in Davos, Switzerland. Klarman had warned in the letter that geopolitical unrest and rising debt levels could precipitate the next global financial crisis.
The firm declined to comment.
There is no indication that investors are souring on Baupost. At the end of 2017, Baupost voluntarily returned 6 percent of its capital to investors, most of whom are deemed to be long-term, blue-chip investors.
The hedge fund firm is widely regarded as one of the least volatile firms, something Klarman repeatedly likes to remind his investors.
“We successfully protected capital in a very treacherous environment,” he told clients in the letter.
Baupost is a value-oriented firm that seeks out undervalued investments with catalysts that can help them realize full value, favoring what it deems to be ignored assets — or very complex ones — mostly in distressed debt, commercial real estate, mortgages, and equities.
Klarman repeatedly tells investors that to outperform over time, managers must find edges that enable them to earn excess returns.
“We differ from others funds as a result of our steadfastly long-term, risk-averse orientation, very limited exposure to short selling, involvement in both public and private markets, [and] willingness to hold cash in the absence of immediate opportunity,” Klarman stated in his letter two years ago.
He told clients last year that Baupost’s event-driven investments performed well. Its “uncatalyzed public equities” fluctuated more in line with the market, he added. The firm also made money on its private investments and hedging portfolio.
“Our team generally performed excellent fundamental analysis all year,” Klarman added in the letter.
He stressed that Baupost was a buyer amid the selloff in various markets toward year-end, stressing that “during the worst moments of the fourth-quarter market carnage” it was entering buy orders and its bids “were getting hit.”
The firm added to positions that declined in price and “moved into attractively priced new investments,” he said in the letter.
As a result of these moves, Baupost’s cash position currently stands at about 20 percent, according to an investor. This is very low for Baupost.
Over the years Baupost has averaged a 33 percent cash position. It has risen as high as 50 percent.
“We are particularly energized to be making new investments when other investors have pulled back, competition is subdued, and prices are in near free-fall,” Klarman stated in the letter. “As this was unfolding, we also reduced several positions that seemed less attractive than other opportunities that were emerging, and we redeployed those funds. And we were preparing the groundwork to be ready for situations that seemed like they could become dislocated in the future.”
He called the portfolio’s year-end valuation “extremely attractive.”
Entering this year, many of its stocks were trading at high single-digit or low double-digit forward-earnings multiples.
Klarman asserted that other holdings “offer attractive returns to catalyzing events if they transpire as expected,” including announced mergers and restructurings that it believes “are progressing well and could result in relatively near-term monetizations.”
Larger private holdings — mostly real estate — are also moving closer to being partially or fully monetized through sales or refinancings, he noted. “Our real estate pipeline of opportunity is strong, as a growing number of projects appear stalled or in need of rescue,” he added.
Klarman also said his private equity pipeline has increased.
“Today’s markets feel strange and enigmatic,” he wrote. “We will not complain about this; indeed, we see it as an opportunity.”
