Seth Klarman's Baupost Group was up less than 1 percent in October, when the S&P 500 and Dow Industrials were up between 3 percent and 4 percent and the Nasdaq Composite surged nearly 6 percent, according to sources but dont on that one-month underperformance bothering Klarman for a nano-second.
For one thing, sources say he is up nearly 12 percent for the year, nearly double that of the S&P 500 and Dow and better than the Nasdaq, which was up 10.5 percent. It is also better than most hedge fund managers.
What distinguishes Klarman, though, is how little risk he takes to generate his impressive returns.
Baupost, on average, has 30 percent of its assets in cash, and it is not unusual for Klarman to sit on 40 percent or 50 percent cash, as was the case in 2006 and 2007, before the global markets imploded. His current cash position is not known.
In any case, this conservative exposure makes it even more remarkable that he outperformed the S&P 500 virtually every year in the past decade and the fact that his oldest partnership has racked up a roughly 19 percent annualized return since inception in 1983.
So, it is hardly surprising that Baupost, which now manages a little over $23 billion, has told clients it will return 5 percent of its capital.
Today, Bauposts opportunity set is smaller than it has been in some years, while our cash balances have grown, Klarman reportedly told his investors.
This is a little disturbing to anyone who has money in the markets. Klarmanwho has tripled assets in the past three yearsin early 2008 raised more than $4 billion, the first time in eight years that he had opened his fund to new investors. He avoided most of the markets carnage that year, his funds losing between 7 percent and the low teens. But, Klarman was busy buying bargains, and in 2009 he was able to take advantage of the carnage and generated average returns of about 27 percent.
Klarman earned a BA in economics from Cornell University in 1979, graduating magna cum laude. He was first exposed to value investing principles working during the summer of his junior year at New Yorks Mutual Shares, the legendary value-driven mutual fund firm founded in 1949 by Max Heine, and also headed by Michael Price, who in his 20s had become a Heine protégé.
Upon graduation, Klarman returned to Mutual Shares and after 18 months Klarman left the firm for Harvard Business School where he earned his MBA and was named a Baker Scholar. He fatefully took a real estate course with professor Bill Poorvu, who asked Klarman to help him and his friends invest their considerable sums of money.
Although Klarman is known as a global value sleuth, people who dont know him well think of him as a Graham & Dodd type stock picker. But, in reality, Klarman has succeeded by deftly exploiting virtually any undervalued market, whether they are equities, junk bonds, bankruptcies, foreign bonds or real estate.
So, the fact that Klarmanwho saw bargains just when most people began panic-sellingis now giving money back should be enough to make bulls come to a screeching halt, and re-think where they believe the markets values lie.
Chances are Klarman will find them where most others arent looking and way before them if others do discover them.