Los nuevos reyes del Antiguo: David Tepper

2013 Earnings: $3.5 billion
Tepper has set a new standard for hedge fund managers. His track record has long been phenomenal, but since the financial crisis his returns have reached a whole new level. In 2013, the 56-year-old founder of Appaloosa Management outperformed the U.S. stock market and the vast majority of hedge fund managers, with his biggest fund posting net returns of more than 42%. Over the last five years, Tepper’s main hedge fund has generated annualized net returns of nearly 40%—and gross returns of some 50%. In what has almost become an annual tradition, Tepper gave back some cash to his investors at the end of the year. In 2013, Tepper’s Appaloosa celebrated its 20th anniversary by pledging $20 million to various charities. Tepper also gave $67 million to Carnegie Mellon University last year—adding to the $55 million he previously gave the university—and continued to support other causes like basic needs and education.

Appaloosa Management is an American hedge fund founded in 1993 by David Tepper and Jack Walton specializing in distressed debt.Appaloosa Management invests in public equity and fixed income markets around the world.

In 1993 David Tepper and Jack Walton founded Appaloosa Management, an employee owned hedge fund, in Chatham, New Jersey.[4][5] The firm through the 1990s was known as a junk bond investment boutique and through the 2000s a hedge fund.

2002 Conseco & Marconi Corp.

In the fourth quarter of 2002 Appaloosa Management returns were heavily a result of junk-bond and distressed debt bets in Conseco and Marconi Corp. that the market was bottoming out.

2007 Delphi

Assets under management in 2007 were $5.3 billion. The Financial Times reports the company has “attracted interest for its large ownership position in Delphi, the bankrupt car parts supplier, and its clashes on whether management has the shareholders best interests in mind or those of GM and the UAW.”

2008 financial crisis through 2011

Appaloosa survived the financial crisis of 2008 with relatively few investor redemption orders.

From 2009 to 2010 Appaloosa Management’s assets under management grew from $5 billion to $12 billion.

In November 2010 the New York Times reported total assets under management of $14 billion.

In 2010 it was reported that since 1993 Appaloosa Management had returned $12.4 billion to clients—ranking it sixth on a ranking of total returns to clients by managers since inception.

In 2011 the company was awarded the Institutional Hedge Fund Firm of the Year award.

In Sep 2011, a Delaware bankruptcy court found that Appaloosa Management is one of four hedge funds that had played a role in Washington Mutual’s restructuring which might have received confidential information that could have been used to trade improperly in the bank’s debt.

Investment Strategy

Appaloosa Management’s investments focus on undiversified concentrated investment positions.Appaloosa invests in the global public equity and fixed income markets with a focus on “equities and debt of distressed companies, bonds, exchange warrants, optionsfutures, notes, and junk bonds.” According to BusinessWeek, the firm’s client base consists of high net worth individuals, pension and profit sharing plans, corporations, foreign governments, foundations, universities, and other organizations.” Investors commit to a locked period of three years during which their withdrawals are limited to 25 percent of their total investment.

0x600

Palomino Fund

The Palomino Fund from its inception in 1995 to 1998 had a 25 percent return. After Russia defaulted, the fund lost 49 percent of its value between February to September 1998. The fund returned –26.7% percent in 2008 and 117.3 percent in 2009. The company was ranked by Bloomberg Markets as the top performing fund of any hedge fund manager managing over one billion dollars

source:businessweek

黄金の太陽: The power of the solar technology etf TAN

EvergladesSunriseJune

Guggenheim Solar (TAN)

46.70 Down 0.56(1.18%) 4:00PM EST|After Hours : 46.10 Down 0.60 (1.28%) 7:11PM EST

Prev Close: 47.26
Open: 47.51
Bid: 46.00 x 200
Ask: 47.35 x 100
NAV¹: 46.95
Net Assets²: 383.58M
YTD Return(Mkt)²: 11.80%
Day’s Range: 45.88 – 47.78
52wk Range: 15.00 – 47.78
Volume: 1,036,528
Avg Vol (3m): 561,480
P/E (ttm)²: 17
Yield (ttm)²: 1.14

¹As of Feb 27, 2014

²As of Jan 31, 2014

The Guggenheim/MAC Global Solar Energy Index ETF seeks investment results that correspond generally to the performance, before the Fund’s fees and expenses, of an equity index called the MAC Global Solar Energy Index. The Fund will normally invest at least 90% of its total assets in common stock, American depositary receipts and global depositary receipts that comprise the Index. Guggenheim Advisors, LLC seeks a correlation over time of 0.95 or better between the Fund’s performance and the performance of the Index.

The Index is designed to track companies within the following business segments of the solar energy industry: companies that produce solar power equipment and products for end-users, companies that produce fabrication products (such as the equipment used by solar cell and module producers to manufacture solar power equipment) or services (such as companies specializing in the solar cell manufacturing or the provision of consulting services to solar cell and module producers) for solar power equipment producers, companies that supply raw materials or components to solar power equipment producers or integrators; companies that derive a significant portion of their business (measured in the manner set forth below under “Index Methodology” section) from solar power system sales, distribution, installation, integration or financing; and companies that specialize in selling electricity derived from solar power.

Source:

Yahoo

Seeking Alpha

<a href=”http://www.bloglovin.com/blog/11808371/?claim=82s4d8mtcvc”>Follow my blog with Bloglovin</a>

El puente de espacio y más allá: Google’s Mission to the moon

The X PRIZE Foundation is an educational 501(c)3 nonprofit organization whose mission is to bring about radical breakthroughs for the benefit of humanity, thereby inspiring the formation of new industries and the revitalization of markets that are currently stuck due to existing failures or a commonly held belief that a solution is not possible. The foundation addresses the world’s Grand Challenges by creating and managing large-scale, high-profile, incentivized prize competitions that stimulate investment in research and development worth far more than the prize itself. It motivates and inspires brilliant innovators from all disciplines to leverage their intellectual and financial capital.

The Google Lunar X Prize offers a total of US$30 million in prizes to the first privately funded teams to land a robot on the Moon that successfully travels more than 500 meters (1,640 ft) and transmits back high definition images and video. The first team to do so will claim the US$20 million Grand Prize; while the second team to accomplish the same tasks will earn a US$5 million Second Place Prize. Teams can also earn additional money by completing additional tasks beyond the baseline requirements required to win the Grand or Second Place Prize, such as traveling ten times the baseline requirements (greater than 5,000 meters (3 mi)), capturing images of the remains of Apollo program hardware or other man-made objects on the Moon, verifying from the lunar surface the recent detection of water ice on the Moon, or surviving a lunar night. Additionally, a US$1 million Diversity Award may be given to teams that make significant strides in promoting ethnic diversity in STEM fields. Finally, Space Florida, one of the “Preferred Partners” for the competition has offered an additional US$2 million bonus to teams who launch their mission from the state of Florida.

Terminamos 2013 con otro gran cuarto de impulso y crecimiento. Ingresos independiente de Google subió un 22% año tras año, a 15,7 mil millones dólares “, dijo Larry Page, CEO de Google.” Hemos hecho un gran progreso en una amplia gama de mejoras en el producto y los objetivos de negocio. También estoy muy entusiasmado con la mejora de vida de las personas aún más con el trabajo continuo duro en nuestras experiencias de usuario.

Dow Jones 16,303.34 0.19%
Nasdaq 4,300.86 -0.42%
Technology -0.41%
GOOG 1,212.69 -0.53%
1,212.69

-6.52 (-0.53%)
Real-time:   3:37PM EST

NASDAQ real-time data – Disclaimer

Currency in USD
Range 1,206.22 – 1,224.19
52 week 761.26 – 1,228.88
Open 1,220.34
Vol / Avg. 1.59M/2.46M
Mkt cap 407.72B
P/E 34.22
Div/yield     –
EPS 35.45
Shares 336.05M
Beta 0.98
Inst. own 72%

Source:

Google

投资于机器人: The future is here investing in robotics

One of the most popular businesses – Bedford’s iRobot – created the floor-cleaning disc Roomba. Another company, Boston Dynamics, built a product called LittleDog that scientists are using to “probe fundamental relationships among motor learning, dynamic control, perception of the environment and rough terrain locomotion,” according to its YouTube page. – See more at: http://www.kahnlitwin.com/blogs/daily-news-blog/robotics-companies-prime-investing-opportunities-for-venture-capital-firms-#sthash.oSd8Mjbt.dpufgineering company that specializes in building dynamic robots and software for human simulation.

These and other companies may be in need of technology consulting services. For example, Liquid Robotics of California recently completed a $22 million round of financing that included minor investments from an oilfield services company and Stanford University, the Wall Street Journal reports. The company is currently valued at $70 million.
– See more at: http://www.kahnlitwin.com/blogs/daily-news-blog/robotics-companies-prime-investing-opportunities-for-venture-capital-firms-#sthash.oSd8Mjbt.dpuf

Google is joining the growing list of companies investing in military technology. On Friday, the Internet giant bought Boston Dynamics, a company known for developing animal-like robots that can outrun even the world’s fastest man.

谷歌加盟公司投资于军事技术的越来越多。上周五,互联网巨头买下波士顿动力公司,该公司称开发动物般的机器人,可以逃脱即使是世界上跑得最快的人。

Source;

Seeking Alpha

 

IRBT-A provider of mobile robots for the consumer market, including the iRobot-LE home robot,
Prev Close: 44.48
Open: 44.30
Bid: 41.06 x 500
Ask: 41.10 x 200
1y Target Est: 41.00
Beta: 1.82
Next Earnings Date: 22-Apr-14IRBT Earnings announcement
Day’s Range: 40.41 – 44.89
52wk Range: 21.13 – 46.99
Volume: 1,106,384
Avg Vol (3m): 993,657
Market Cap: 1.18B
P/E (ttm): 43.72
EPS (ttm): 0.94
Div & Yield: N/A (N/A

Boston Dynamics is an enVenture capital firms in Boston may want to pay attention to the increased number of robotics firms in the state, according to the Boston Business Journal. There are at least 60 known robotics companies in Massachusetts, as reported by the Massachusetts Technology Leadership Council.

The company began as a spin-off from the Massachusetts Institute of Technology, where National Academy of Engineering member Marc Raibert and his colleagues first developed robots that ran and maneuvered like animals. They founded the company in 1992, and their ground-breaking work continues to inspire several of the company’s activities.

Today the company creates a variety of innovative robots, including BigDog, a quadruped robot for travel on rough-terrain, PETMAN, an anthropomorphic robot for testing equipment, RISE, a robot that climbs vertical surfaces, SquishBot, a shape-changing chemical robot that moves through tight space, and many others.

Co Founder

Invest in the future: The bridge to tomorrow

robot-wallpaper-2

With 2013 coming to an end, can robotic companies keep up their impressive gains? Shares of top robotic companies in 2013 have had inhumane like gains. I’m convinced these gains will continue right on through 2014. As we become an even more technologically advanced and diverse global economy, the dependence certain companies have on robotic devices to speed up their manufacturing and processing only increases. In 2013, this dependence seemed to increase quite dramatically. Behemoths Google (GOOG) and Amazon (AMZN) have both spent billions acquiring numerous robotic companies in the last couple years. Amazon bought robotic manufacturer Kiva Systems in 2012 for approximately $775 million. Most recently, On December 16th, Googlemade a purchase of Boston Dynamics, an engineering company that has designed mobile research robots for the Pentagon. This acquisition awoke investors and helped them realize the potential that any robotic company has of being bought out by the likes of Google or Amazon.

 

So what’s in store for 2014? Colin Angle, the CEO at iRobot (IRBT), was not afraid to share his robust thoughts on his own robotic company. He went on record saying “I think it’s going to be a great growth year for us,” he added that iRobot, “is expecting mid to high teen revenue growth in 2014.” These comments rallied investors and subsequently shares of iRobot. Shares of iRobot exploded 15% in the same trading day as the announcement. From the beginning of 2013, iRobot’s stock has risen over $15 per share and according to the CEO, the gains and rewards for shareholders are only going to continue.

Deep value, growth

 

From Earth to the Sun:Delaware Financials

helixPro_jam2

DELAWARE

Dupont’s Stocks

Market open-$63.22
Change:+0.26 +0.41%
Volume:2.01m
Real time quotes
Previous close: $ 62.96
Day low: $62.65
Day high:$63.31

Open: 63.06
52 week low:$46.02
52 week high:$65.00

Market cap:$58.41B
Average volume:4.19M
P/E ratio:20.35
Rev. per Employee:$516,343
EPS:3.11
Dividend:0.45
Div yield:2.85%

Ex dividend date
2/12/14:$63.27
+0.31 +0.49%

Volume 2.01m
10a
11a
12p
1p
2p
3p

Previous close
$ 62.96
Day low
Day high
$62.65
$63.31

52 week low
52 week high
$46.02
$65.00

Company Description
E.I. du Pont de Nemours & Co. science-based products and services company. The company finds sustainable, innovative, market-driven solutions to solve some of the world’s biggest challenges, making lives better, safer, and healthier for people everywhere. It operates through eight segments: Agricult…
Valuation
P/E Current
21.24
P/E Ratio (with extraordinary items)
12.27
P/E Ratio (without extraordinary items)
12.54
Price to Sales Ratio
1.66
Price to Book Ratio
3.77
Price to Cash Flow Ratio
19.07
Enterprise Value to EBITDA
10.80
Enterprise Value to Sales
1.87
Total Debt to Enterprise Value
0.19
Efficiency
Receivables Turnover
6.29
Total Asset Turnover
0.71
Liquidity
Current Ratio
1.82
Quick Ratio
1.22
Cash Ratio
0.33
Profitability
Gross Margin
27.00
Operating Margin
11.21
Pretax Margin
9.65
Net Margin
7.88
Return on Assets
5.63
Return on Equity
21.65
Return on Total Capital
11.28
Return on Invested Capital
11.99
Capital Structure
Total Debt to Total Equity
77.93
Total Debt to Total Capital
43.44
Total Debt to Total Assets
24.20
Long-Term Debt to Equity
67.16
Long-Term Debt to Total Capital
37.44
Officers and Executives

Principal Manufacturing Industries

(Percentage of Employment)

33.8% Food

11.2% Computer 8t Electronic Products

10.2% Chemicals

6.3% Fabricated Metal Products

6.2% Plastics 8i Rubber Products

3.2% Paper

29.1% Other Manufacturing Industries

BASIC BUSINESS TAXES

TRADITIONAL INDUSTRIES: Manufacturing, agriculture, finance, chemistry

EXPANDING INDUSTRIES: Transportation and utilities, education and healthcare, leisure and hospitality

 

CORPORATE FINANCE TAX: Minimum of $75 and maximum of $180,000 per year GENERAL PROPERTY TAXES: Based on assessed value of real property for county, municipal, and school district purposes; personal property exempt; the Delaware Economic Development Office can provide property tax information for all geographic areas within the state.

Music at the bottom of a well

Jupiter hurricane

SFP Value Realization Master Fund: Symphony Financial Partners

Author: Margie Lindsay

Source: Hedge Funds Review | 08 May 2012

Categories: Hedge Funds

Tokyo-based hedge fund run by SFP exploits market inefficiencies by investing in undervalued Japanese companies and implementing changes leading to share price appreciation over a two to four-year period.

Investors may think they have heard every reason why they should be invested in Japan. If they have not talked with Symphony Financial Partners (SFP), they may be missing a unique opportunity.

Along with his partners, David Baran (pictured), co-chief executive and co-founder of SFP, has reinvented the concept of an event driven strategy to fit the peculiar Japanese situation.

“We are the event creation fund,” explains Baran. The SFP Value Realization Master Fund exploits market inefficiencies by investing in undervalued listed Japanese companies and “constructively engaging management” to implement changes leading to share price appreciation. The goal is to realise gains over a two to four-year period.

With more than 20 years of experience investing in Japanese equities, Baran, together with co-CEO Kazuhiko Shibataand managing director Jason Schwartz, first began looking at the Japanese market in the late 1990s/early 2000. “At that time there was a lot of private equity money being raised for Japan. Our close contact with those investors led us to realise that while the money was there to buy, the offers were not there to sell,” says Baran. “We realised there was a space in the marketplace that was not being appropriately exploited.”

This is where SFP stepped in. Private equity investors usually require control while equity investors tend to be passive. “We found in the Japanese equity market an abundance of very cheaply priced equities where nobody seemed to be in control. The companies were operating somewhat on autopilot. Doing very well, but there was no engagement with shareholders.”

Changes in Japanese corporate law and culture were creating a pool of what Baran calls “orphans”: companies where there was nothing really wrong but no-one seemed to care about them.

“We decided these were the companies we were going to care about. We were going to make a substantial investment in these companies through the listed equity. We would become the number one, two, three shareholder in the company.”

This meant owning large stakes in companies, ranging from around 10% to 49% in one case. Using this significant holding, SFP then works with management to “cause the shares to be properly priced”. The intention, notes Baran, is not to disrupt or reorganise management but rather to help management realise value for the company and for shareholders.

Fund facts

Full name of fund  SFP Value Realization Master Fund
Portfolio manager(s)  David Baran, Kazuhiko Shibata, Jason Schwartz
Investment/management company  Symphony Financial Partners
Contact information  the new Otani Garden Court 9F, 4-1 Kioi-cho, Chiyoda-ku, Tokyo 102-0094, Japan (+81 3 45000 9250; fax +81 3 3222 1312
Launch date  September 2003
Assets under management  $200 million (at May 1, 2012)
Net cumulative performance since inception  52.66% (at 29 February 29, 2012)
Annualised return  5.21%
Annualised standard deviation 18.13%
Administrator Apex
Custodian Citi
Prime brokers Citi, Goldman Sachs
Legal counsel Schulte, Roth and Zabel; Maples and Calder; Oebashi
Strategy  event driven, activist
Share classes  A, B, C
Management fee  2% (A and B); 1.5% (C)
Incentive fee 20% with high water mark (A); 20% with high water mark (B); for shares acquired during 2011, 10% until end of 2012 and 15% thereafter with high water mark (C); for shares acquired after 2011, 15% with high water mark (C)
Domicile Cayman Islands
Lock-up  None but possible penalty for redemption within one year (class A); two years (B); redeemable up to 5% on first and second anniversaries of acquisition and up to 50% on third anniversary of acquisition (C)
Redemption/liquidity terms  quarterly with 90 days’ notice (A and B); quarterly with 90 days’ notice

“The equity markets [in Japan] are not the same as other equity markets where being listed confers on the equity owner, the shareholder, certain rights that they will exercise. That’s not really the mechanism for Japanese equities. There is no market for corporate control, no clearing price at which an entire enterprise can be priced,” he explains.

“Instead of taking the ‘my wallet’s bigger than your wallet route’, we want to work with management.”

Big in Japan
All the ingredients for the strategy were present in Japan. First, there was a large target universe because of prolonged market weakness. The status quo clearly was not working. Companies needed to address strategic issues, financial performance, shareholder discontent and governance, something management was not necessarily equipped to do.

“They’re good guys, just never had this type of external bombardment of demands from shareholders causing them to rethink the way they do their day-to-day business,” says Baran. “Generally there’s nothing wrong with the way they do day-to-day business. The problem is with the share price.”

In addition corporate management stagnation had created mispricing as well as opportunity. Drastic improvements in corporate governance norms meant management was accountable to shareholders while domestic investors were agitating for change. SFP saw an opening to step in and avoid value traps by working with management to enhance share price performance,

Baran says SFP spotted the opportunity and moved in. “You don’t need control. You need influence. You need to be able to sit down with management and come up with up viable ideas which they can implement and will lead the share price to higher and higher ground,” he explains.

“Those strategies may be share buybacks, maybe having an investor relations department, may be increasing dividends. But most effective we have found is some sort of corporate action, whether it’s a merger or an acquisition of something else or a management buyout. Something a bit more binary as opposed to something that is a bit more creative. Raising dividends is nice, but it’s a governance thing. Share prices may react to it in the short term but it’s usually not enough,” Baran adds.

Baran is proud of the fact SFP executed the first hedge fund-led management buyout in Japan, creating alpha for his investors by exiting to a strategic buyer at a substantial premium.

In fact the premiums almost appear too good to be true. The catch is that it does not take six to 12 months but more likely two to four years to cause enough of a sea change in management activities to realise the investment.

In the first quarter of 2012, there were 19 tender offers in Japan with an average bid premium of 51%. “That’s a lot of deals and a big premium,” comments Baran. “It’s indicative of exactly what we’re saying: there is so much optionality in Japanese equities that you ignore them at your own peril, performance-wise.”

He admits SFP is probably alone in completing multiple MBOs in Japan as well as M&A executed and implemented. “Because we take such large stakes in our target companies, we’re much more able to influence the pricing of any of these corporate actions. So whereas the average premium bid for the first quarter this year was 51%, the last deal we did in December 2011 was 135%.”

SFP can command such returns because it is setting the price. “We own enough of the company, if you want to do the deal, this is the price it’s going to happen at. Of course there was some horse-trading going on, too. We actually see the biggest risk for investors in Japanese equities in allowing Japanese management or other strategic buyers to buy Japanese companies too cheaply,” says Baran.

Fair pricing
According to Baran the average equity shareholder is “so thrilled to be getting a premium for what they paid for it that they’ll sell at any reasonable price”. The problem is the reasonable price is not actually a fair market price.

“You’ve got companies trading one times Ebitda and management is buying them at two or three times Ebitda when a real buyer would pay five or six. You look at it and say ‘wait a minute. Just because you’re getting premium of 50% doesn’t mean it’s a fair price, just a higher price’.”

With all this potential value in the offering, SFP seems at present to be the only organisation seizing the chance to make money. Modestly Baran says he puts it down to stubbornness and a lack of ability by anyone else to do it.

However, he admits the real problem is that it is a difficult trick to pull off. “If you’re a hedge fund manager you almost by definition don’t have the skillset to engage with management to do this. We came at this from a completely different perspective. We came at it from a private equity arbitrage perspective,” explains Baran,

Seeing an arbitrage opportunity, the next question was how to get at it. If the company is trading at a discount to net cash on its balance sheet, the problem for SFP was how to close that value gap. “Can you take over the company, do a levered recap and distribute all the cash? Probably not in Japan. That’s why the opportunity exists.”

SFP usually has 10-15 core portfolio holdings limiting positions to 10% of assets under management at the time of investment. Industry concentration limits are set at 15% of AUM. The strategy uses no leverage and usually has cash holdings of 5% to 10%.

Finding the companies, admits Baran, is about “shoe leather”. “You can do all the work you want in your office, pulling together annual reports and 10Ks and other types of information about the company’s business prospects, but you’ve got to go and visit with management, see the factories, see the competitors, see the clients and put together a mosaic.”

Finding underpriced companies is not difficult, he says. “Figuring out what is going to make them fairly priced is a lot more complicated. Implementing what you figured out is a Herculean task.”

With only around $200 million AUM, the fund has no capacity problem. While SFP has not been actively marketing the fund, Baran thinks attitudes towards investing in Japan may be changing. He is confident the fund will attract more investors this year, mainly from outside Japan although domestic investors are also becoming interested in what they term ‘concentrated portfolios’.

Baran maintains the fund offers a compelling investment opportunity. With his own background at Lehman Brothers, Goldman Sachs and Barclays Capital, coupled with Shibata’s experience also gained at Lehman and Goldman Sachs, Baran is confident their expertise in the Japanese market and the fund’s performance will attract more investors in future.

http://www.symphony-fp.com/

Dead kings and worlds of Gold

2061-438879

 

Portfolio of a successful hedge fund Master Capital Management:

 http://www.nasdaq.com/quotes/institutional-portfolio/masters-capital-management-llc-72853

Mike Masters: The making of a maverick

01 SEP 2011 –

By Kit R. Roane

 

Mike Masters: I have a
Christian worldview
Photographs by Michael Rubenstein

Mike Masters, a six-and-a-half-foot former all-American swimmer, is used to pushing against the current. Over the past four years, he has repeatedly bucked his hedge fund brethren by calling for financial reforms and has laid into both investment banks and institutional investors for piling into commodity derivatives, which he believes have spiked prices and hammered the poor.

 

“I have a Christian worldview,” Masters says unapologetically of his Capitol Hill activities. “Investing is not just about efficiency, and not everything is an investment, even if it is theoretically uncorrelated. There are bigger ideas out there.”

But these days he’s battling a turbulent current of a different sort: declining hedge fund returns. The roughly $200 million he runs through Masters Capital Management has fallen by more than 12% through July 2011, compared with a gain of 2.20% in the AR U.S. Equity Index and a gain of 2.75% in the S&P 500.

Masters is by no means alone in what has been a tough year for even the most storied hedge fund managers. But the loss stands out for the Texas-born money manager, because over the past 16 years his financial prowess has generally matched his fine-tuned sense of social justice. Masters has produced annualized returns over the past 24 months of more than 80%, according to investors, compared with an S&P return of about 28% during the same period. Longtime investors have enjoyed a compound annual growth rate of about 29% since 1995. More remarkably, they have experienced only three down years.

Although Masters refuses to discuss fund returns, noting that Masters Capital Management works only with accredited investors, he admits that nothing comes easy. “It is not about home runs for us, as much as sometimes I wish it would be. It’s more about approach, and making singles and doubles, and repetition,” he explains. “To a certain extent, I think this business is a lot like the insurance business and other businesses that have to do with risk. If you are making high-probability decisions, you will make mistakes, but you will be successful over time. The trick is to make enough of these high-probability decisions.”

Masters, 45, doesn’t fit the mold of either a legislative firebrand or a hedge fund titan. He is a devout Catholic who is active in several charities. Cordial, if informal, he has an affinity for sockless loafers and eschews wearing a tie. Although a senator once called him “the most powerful guy in Washington” following one round of his testimony on Capitol Hill, he seems the antithesis of that as he politely excuses himself to return to his trading screens one hot Atlanta afternoon, a towering plate of Kentucky Fried Chicken balanced precariously in one hand.

His fund, the Marlin fund, is equally difficult to pin down. Run out of a well- appointed office suite across from a Johnny Rockets burger joint and named after a feisty sport fish, it focuses on what Masters calls catalyst trades.

In general, this means he looks for triggers that will move mispriced securities, usually highly liquid midcap and large-cap stocks and their options. But to do that successfully, Masters has gone far off the beaten path, digging deeply into behavioral finance. He once hired a former Central Intelligence Agency spook to help him understand competitive intelligence, and brought in three philosophy graduate students to suggest new ways of conceptualizing and organizing his trading system.

 

Mike Masters: We needed to evolve

Masters sees such pursuits as critical to his success. “Some funds spend a lot of their time on marketing and other aspects of the business, but for better or worse, we spend an inordinate amount of time on trying to understand why we do the things we do,” he says. “I think that has been the core of our success.”

 

The portfolio tends to be concentrated in 25 to 40 names, with no single name representing more than 10% of the total and no sector representing more than 30%. Masters generally turns over about 70% of the book within six months or less, with positions often being held only a matter of days. More than half of it is usually placed in listed options (long both puts and calls), so the portfolio can look quite different over time. For instance, Marathon Oil showed up among Masters’ largest holdings in March 2011 but was nowhere to be found in December 2010.

Trades can have a fundamental element, but nearly all of them are heavily influenced by Masters’ judgment about how other groups of market players (mutual funds, pension funds, hedge funds and the like) invest and how their movements in the market will affect securities.

This can be as simple as understanding that value investors tend to be less aggressive when buying securities than growth investors. “When you see that value-to-growth transition or growth-to-value transition, it will affect the price action,” Masters says.

But the trade is generally tied to how such homogeneous groups will react to some apparent or not-so-apparent event, from earnings announcements, updates and road shows, to end-of-quarter window dressing or signs of distress. In 2003, for instance, Masters made a slew of buys on what he calls the uncertainty trade. President George W. Bush was threatening war in Iraq, infecting the financial markets and the real economy with doubt. Masters’ view was that once the war started, whether or not the U.S. won, the uncertainty that was holding back everything from stock prices to business expansion would be removed. More precisely, he figured defensive stock groups would do poorly compared with more volatile names.

“We decided to make a pretty big bet, which actually worked well,” he says. Securities and Exchange Commission filings from the start of 2003 show Masters holding large option positions in the Amex Japan Index, Goldman Sachs, Intel, J.P. Morgan and United Parcel Service, among others. The S&P 500 index, after declining or flatlining through February of that year, took off after the U.S. declared war in March and gained more than 18% over the next six months.

Masters made a similar call toward the end of the credit crisis in 2009, buying airlines, financials and other beaten-down sectors, with the portfolio at the time showing a heavy slug of American Express, Bank of America, Wells Fargo, FedEx, MetLife, Prudential Financial, US Airways, Delta Air Lines, UAL, and iShares MSCI Emerging Markets Index Fund. It also contained other unloved companies, such as Temple-Inland, Louisiana-Pacific, MBIA, General Motors and Eastman Kodak.

This June, the fund followed a more typical behavioral trade, purchasing stocks in the belief that manager mandates would force mutual funds to put cash to work. That would drive a rally toward the end of the month, which underinvested hedge funds would chase. Quantitative programs, the theory went, would then add fuel to the fire. Masters says such situations are akin to one person buying a block of Exxon, causing others to scramble, and “then suddenly the market is up 10%.” The idea appears to have panned out, with the S&P 500 rising a little more than 3% over the last 10 days of June.

In 2010, such maneuvers helped Masters Capital return greater than 41%. However, Masters wasn’t crowing much in his midyear update to clients this time around. In the firm’s June 13 investor letter, Masters and his team noted their disappointment in the performance, saying the European debt crisis, continued fighting in Libya, and weakened domestic economic data had contributed to volatility in the stock market and led to both “weak trading results and negative attribution from our core portfolio positions.”

Masters responded by reducing his position in some longer-term holdings, such as Swift Transportation, because of concerns about the broader economy. That stock had been highlighted the previous quarter for improving business dynamics and fits within a general move by Masters, as he again brings in a few new investors, to find more core trades that take advantage of industrial shifts. He notes that such shifts have occurred in the railroad industry and are now occurring in the airline industry, as companies in both have cut back supply and realized “that a dollar in price is worth more than a dollar in volume.”

Performance-measuring schemes, he says, have turned too many hedge funds into short-term momentum investors, which may create new opportunities for his firm. “We have always had a sort of trading orientation,” he adds. “But if you want to know where most of the real alpha is, it is out a year or two.”

While that belief didn’t stop Masters from selling a bit of Swift and focusing on strategies to trade around second-quarter earnings reports, his investment letter made it clear that the fund would continue to watch that company’s progress “and allocate capital accordingly.”

This year is just a hiccup for Masters when compared with the volatility he and his investors navigated in 2008. The credit crisis and ensuing equity swoon, he says, “tested everybody’s belief that there was some objective value in the marketplace.”

According to Masters, his fund was flat through much of 2008, and he didn’t begin putting significant capital to work until October. But Masters was still early.

“What we missed in 2008 and 2009 was the aftermath of Madoff and what that would do to the fund-of-funds industry. We didn’t know it would be that severe in terms of the unwinds, and that really hurt us,” he says. “We stayed in our positions, although it was very painful.”

This led to pointed questions on investor calls. “He was in a lot of airline stocks at the time,” says John Kuck, who was Masters’ college roommate and an initial investor in his fund. “These things went from $4 to $2, so you can’t help but do a little armchair quarterbacking.”

But Masters didn’t shirk from his trades, say two investors. He got on the call, apologized for the volatility and noted that as the biggest shareholder, he was hurting more than anyone. Then he said that despite being early, the trades were solid and he was going to ride them out.

“As an investor, you might have doubted where he was going and his judgment. But he was able to trust his instinct and stick with some bets that were really hard,” says Kuck. “It got ugly. We went down about 50%. I think that his character led him through that. And the experience of going down 50% to—within 12 months—being up 90%, or net 70%, told me a lot about him. I had a lot of respect for Mike, not that I didn’t have it before, but his convictions were unquestionable.”

All of Masters’ losing years were followed by sharp upward reversals, with data showing him roaring back from a 2002 loss of 14.65% to an 80.57% gain in 2003. He answered the 2008 loss of 22.59% with a 69.21% gain in 2009. In each case he handily outstripped stock market rebounds.

“Mike has had some bad quarters, but he’s had a lot of good ones too,” notes Neal Allen, a co-founder of Invesco Capital Management, who placed part of his IRA with Masters in 1999 and says he’s always been impressed by Masters’ discipline and flexible approach. “There have been a lot of changes in the market, and Mike seems to have been able to adapt to the changes that have come along.”

Although investors say Masters started out charging no management fee, he now takes the standard 2% of assets under management. He charges a 20% performance fee on the first 35% return, 25% on any gain from 35% to 70%, and 30% of any gains over 70%. The fund carries a high-water mark and a hurdle rate of Libor (30-day, 12-month average). There is no gate; however, there is a one-year soft lockup, carrying a 2% penalty. Investors can redeem monthly with 30 days’ notice.

Masters grew up in Marietta, Ga., in a family where stock trading was a fluid conversation. His maternal grandmother, Cleo, had a margin account. His father, Burt, traded professionally for five years before obtaining an MBA from Emory University. He then worked as a consultant and entrepreneur in the food service industry and a variety of other fields.

Both Masters’ uncle Louie and uncle Larry were avid investors of the Graham and Dodd variety. While they favored a diversified portfolio of classics—such as Dixie Bearings and U. S. Steel—Masters’ father loved the short side, always telling his son that knowing when to sell was just as important as knowing when to buy.

The lesson stuck with Masters, who recalls that good-natured arguments about investing philosophy were common at the dinner table whenever one of his uncles was around. “My dad would always say my uncle was too conservative,” recalls Masters, “and my uncle would say my dad was too aggressive.”

The young Masters wasn’t destined to run a hedge fund, however. Growing up, he was interested most in athletics, and when he arrived at the University of Tennessee on a swimming scholarship, his ultimate goal was to become a physician.

The rigor required to attain that childhood dream became apparent a few years into college, and he ended up majoring in business. But swimming stayed with Masters. An all-American in the freestyle sprint for four years, Masters’ Olympic bid was cut short when he contracted mumps the summer before the Olympic trials.

By the time his Olympic hopes were dashed, Masters had begun seriously dating the woman who would later become his wife, Suzanne, whom he had met at a fraternity party. He decided to apply to Emory to get an MBA. When the school told him he needed some relevant work experience first, he used a neighborhood connection to get a job as a broker trainee. It was a bad fit. Masters and the brokerage parted ways shortly after he tried to unilaterally lower the commission structure for his clients so they could trade more actively without prohibitive cost. “I guess I was pretty naive,” he says.

The one thing Masters had enjoyed about the job was trading, and he says he was fairly good at it. So, in 1994, after discussing his situation with his father and Suzanne, the 28-year-old Masters decided to try to do it full-time. He wrote his initial approach on a Lotus spreadsheet, had his father help him come up with a prospectus, and built a piece of furniture in the garage designed to hold enough cathode-ray-tube trading screens to track about 200 stocks at a time. At first, Masters planned to trade stocks using a combination of market triggers and fundamental variables, such as cash flow, book value and the like. But “the ultimate conclusion I came to was, on the shorter time horizon, the only thing that matters is the catalyst, and that was the solution,” he says.

Masters’ timing was good. He launched at the cusp of a great bull market that would, by 2000, lead technology shares to dizzying heights. But he still needed to persuade investors that his strategy was predictable and sound. He was working with about $25,000 in personal capital at the time, had no track record and no fund. Undaunted, he began knocking on doors, pitching former customers and acquaintances. “Most folks would say, I’ll give you $25,000 or $50,000. The biggest single investment was $200,000,” he says, adding that most of the capital came from family members or wealthy individuals who probably gave him less money than they were likely to lose “playing golf on a Saturday.”

Rod Chamberlain, a retired salesman and builder of supercomputers, was introduced to Masters by some early investors from a Georgia moving company. He is among those who fondly recall Masters giving him the nascent pitch. “Right from the beginning, I felt like this guy could really accomplish what he said, that he wasn’t BS-ing,” says Chamberlain, 74, who invested $100,000 in June 1995.

By that time, Masters had raised $700,000 to start his fund. Trading out of a 100-square-foot room owned by a local brokerage, he quickly began posting eye-popping returns. In 1996, Masters returned just over 79%. He followed with a greater than 57% return in 1997, the year he moved his operation into its own 2,000-square-foot office just upstairs. Meanwhile, Masters’ winning streak continued to gain notice. By 1999, he had attracted about $300 million. In 2000, fund assets reached $500 million, and Jack Schwager came calling to interview Masters for his investment book series, Market Wizards, describing the hedge fund manager as so focused that he would physically lock himself in his trading room during market hours.

About the same time, with money pouring in, particularly from European funds of funds, Masters decided to pull up stakes and follow several other hedge funds to the Virgin Islands, attracted by the beneficial IRS tax treatment. (He relocated the fund back to Atlanta in the summer of 2010.)

The rapid fund inflows, which peaked in December 2001 at about $650 million, were a mixed blessing, because many of Masters’ new backers seemed to be chasing returns, with little interest in understanding his philosophy or his style of investing. “I felt like I was riding a rocket ship as assets were coming in, and the ride was fast enough for me,” says Masters, who was by then one of the largest traders of single-company stock options. “I was trying not to go crazy.”

The ride ended abruptly with the market cascade that began in March 2002. The hot money, says Adam Cooper, a partner in the firm, “pulled the rip cord.” By 2003, funds under management were down to just above $200 million. Masters stopped seeking new investors, and assets under management have remained south of $300 million pretty much ever since.

“Certainly one of the reasons why I have not been enthusiastic about raising capital is that most investors don’t have a high tolerance for pain, and when they should be investing, they often go the other way,” Masters says, adding that during this period, he was also wrestling with his underlying strategy of catalyst trading.

“We knew that things had changed. We could see it in our performance and in the fact that some things we were doing weren’t working the same way,” he says. “My view was that we needed to evolve, and I thought it would be good to hire some experts in epistemology to look at our process and our thought construction.”

Cooper called up Harvard, then Yale. Nobody returned his calls. At Columbia, they “thought I was selling insurance,” says Cooper. Then he reached out to NYU. He explained to the dean of the philosophy department that his firm was working on a trading strategy and wanted help with the philosophical underpinning first. Masters ended up hiring three graduate students from NYU for an initial six-month stint at the hedge fund’s St. Croix offices.

“We weren’t searching so much for answers about how one ought to trade, but were more focused on seeking clarification on what general principles underwrote Michael Masters’ trading strategies,” says Dr. Michael J. Raven, who was one of those graduate students and now teaches philosophy at the University of Victoria in Canada. He added that during the process, Masters showed a “raw curiosity” and “a sincere enthusiasm for reflecting critically on trading strategy.”

Masters also brought a greater behavioral bent to his work, sending Cooper off for months to cull and summarize research on sometimes arcane subjects such as cognitive bias and the effect of news on buying behavior. An offshoot of Masters’ research in this area led him to Capitol Hill in 2008.

After looking at fund flows and doing some calculations on oil demand, Masters wrote a note to Warren Mosler, an old friend and fellow hedge fund manager who runs III Offshore Advisors from the Virgin Islands, saying he believed pension funds and other “index speculators” were having an outsize effect on rising commodity prices. Cooper says Mosler passed the note to Connecticut senator Joseph Lieberman, who invited Masters to testify before the Senate.

Masters told the Senate that hundreds of billions in investment dollars entering the commodities futures markets had turned speculators into virtual hoarders, that this money was squeezing millions of U.S. consumers and could end up starving millions more of the world’s poor.

Many lawmakers struggling with rising commodity prices welcomed his testimony. At one hearing, Missouri senator Claire McCaskill even thanked Masters for providing a simple road map for puncturing oil prices, which she said lawmakers were under “incredible pressure” to reduce.

Since then, the effect of speculation on the price of commodities has been widely debated. While many experts think that speculation plays a role in creating excessive short-term price volatility, there is little consensus over whether an increase in speculation has altered longer-term price trends.

Masters was particularly effective in arguing for position limits and other regulatory changes to the commodities market because of his status in the financial community. “He had high ideals, and you don’t often associate such high ideals with hedge fund folk,” says Dave Andrews, a Holy Cross brother and a senior representative of Food & Water Watch, who calls Masters’ continuing leadership in the area “significant.”

However, not everyone thought Masters was being purely altruistic, with some critics noting that his fund held many airline and other stocks being battered by rising oil prices. (As of March 2011, Masters continued to hold several such positions.)

Others just blasted the economic reasoning underpinning his testimony. Paul Krugman, the Nobel Prize–winning economist and New York Times columnist, called it “just stupid,” while Michael Dunn, the outgoing Commodities Futures Trading commissioner, said recently that the position limits Masters advocated may be, at best, “a cure for a disease that does not exist or at worst, a placebo for one that does.”

Told of the criticism, Masters just shrugs as though he’s heard it all before, then leans back in his chair and patiently lays out his reasoning again. It is clear Masters sees little wisdom in the crowd, whether in Washington or on Wall Street, and he plans to keep making his bets accordingly. “It’s important to understand that the market is not God,” he says. “It isn’t perfect, and prices do get out of whack.” AR

http://www.hedgefundintelligence.com/Article/3205813/Ten-Years-of-Absolute-Return-Top-Funds-by-Strategy.html