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The Morning Brief: Starboard Turns Up Heat on Yahoo

Jeffrey Smith is at it again. The head of New York activist hedge fund firm Starboard Value fired off a letter to Yahoo chief executive officer Marissa Mayer and Yahoo’s board of directors warning them not to do a large acquisition and calling on the company to execute a “tax-efficient” separation of its Alibaba holdings and Yahoo Japan.

“As we have repeatedly explained, we believe a cash-rich split-off to separate Yahoo’s non-core minority equity interests has serious shortcomings,” Smith asserts in the letter. “The total consideration that Yahoo would receive in exchange for the Alibaba and Yahoo Japan stakes would likely be lower than the valuation that those assets would garner if they were traded as separate public entities.”

Smith also calls on Yahoo to cut costs in its core business and once again urges it to merge with AOL. He explains that a merger with AOL could result in a tax-efficient separation of the non-core minority equity investments, result in “cost synergies” of between $1 billion and $1.5 billion and provide a strong growth platform “given AOL’s progress in mobile and video advertising.” He then warned that if the company chooses “a different path,” then “significant leadership change” would be required at Yahoo. Shares of Yahoo jumped 3.3 percent, to close at $50.20.

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In an unrelated deal, MeadWestvaco Corp., another Starboard activist holding, on Thursday announced it will spin off its specialty chemicals business. Last year Starboard called on the packaging company to sell non-core assets, cut costs and buy back a hefty chunk of stock. He also said there is a lot of value than could be extracted from the company’s overfunded pension plan. In December the hedge fund raised its stake in MeadWestvaco to 10 million shares, or 6.1 percent of the total outstanding. The stock closed up nearly 6 percent on Thursday, at $45.60.

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Avenue Capital Group co-founder Marc Lasry is bullish on the debt of energy companies. Appearing on CNBC, the New York-based distressed credit specialist said investors could enjoy gains of as much as 30 percent thanks to currently low depressed prices of the paper and the future forecasted price of oil for the next two years.

“Three months ago, the debt of a number of energy companies was trading at par or higher, and today that same debt is trading anywhere between 50 cents and 70 cents on the dollar, so I think you can generate equity returns,” Lasry said in the interview. He also said investors should also be able to convert debt to equity of energy companies.

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Shares of Herbalife jumped another 8 percent or so on Thursday amid a media mud-wrestling match between the multi-level marketer of nutrition supplements and billionaire hedge fund manager William Ackman, whose Pershing Square Capital Management has had a high-profile short bet against the company. Herbalife complained that Ackman cancelled a planned meeting in December, while Ackman maintained that he merely postponed the get-together.

“I’m sorry about having to postpone our meeting,” Ackman’s lawyer reportedly wrote in a December 11 e-mail to an executive at Herbalife, according to Bloomberg. “We’re not passing up the chance to meet you.” The stock is now up about 13 percent in the past two days.

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Clifton Robbins’ Blue Harbour Group boosted its stake in Investors Bancorp by about 2.3 million shares, or 7.4 percent of the total outstanding, in an amended 13D filing. The New York-based hedge fund firm has not spelled out any plans it has for the bank holding company.

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Shares of Micron Technology rebounded sharply on Thursday, jumping nearly 5 percent. This was good news for its two large hedge fund holders, Boston-based Baupost Group and New York-based Greenlight Capital.

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So, how did hedge funds perform on average last year? It all depends upon who you ask. For example, on Thursday, eVestment reported that hedge funds, on average, lost 0.15 percent in December, the fourth losing month in the second half of the year, and finished the year up just 2.48 percent. On the other hand, Chicago-based Hedge Fund Research said its Weighted Composite Index climbed 0.3 percent in December and finished the year up 3.6 percent. Even so, this was still well below the long-term average hedge fund performance of 10.7 percent, according to HFR.

“Hedge fund managers maintained conservative exposures with equity markets near record highs,” it points out in its press release. In any case, both scorekeepers agreed that systematic CTAs were the best performers. HFR computes the group was up 1.5 percent in December and 11.2 percent for the year. However, eVestment calculates the gain for managed futures funds at 8.63 percent for the year.

“The largest managed futures funds performed far better than their peers in 2014, returning an average of nearly 14 percent,” it adds in its announcement.

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Mariner Investment Group said it closed on a $502 million collateralized loan obligation, the first transaction by Mariner’s newly created CLO business. In November Mariner hired the 13-member corporate credit team from strategic partner, ORIX USA, to head up this business, which is co-led by David Martin and Erik Gunnerson.

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