Dear Baupost Fund Shareholder,. We are pleased to report a gain . of all dividends. m arketfolly. Click here to read more hedge fund letters at MarketFolly. com. Seth Klarman Shareholder Letter March 4, at am by. I found some great excerpt from Seth Klarman’s Annual Letter (H/T to. During the financial crisis, Seth Klarman’s funds lost somewhere between 7% and . Letters – · My Favorite Quote from Baupost’s Annual Letter.

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This blog will try to dissect distressed debt investing, up and down the capital structure. We will look at current distressed debt situations, try to explain the ins and outs of how decisions are made baupoost the distressed debt world, probably rant a few times about positions that are working against me, and hopefully enlighten some readers. Readers know in the past we have covered Seth Klarman’s letter to investors numerous times here is one such post: Wisdom from Seth Klarman.

This week, we received Baupost’s Letter to Investor where Seth Klarman, along with heads of the public investing, private investing, and operations group talk about everything from the investment climate, the government policy, and Europe among many topics. A special emphasis, like we’ve seen in past years, was on the process, culture, and modus operandi of Baupost. It is a fantastic letter.

While I annul not post or quote the entire letter, as a distressed debt investor, I found one set of paragraphs particularly relevant: A follow-up question was asked: Why, if distressed debt is such an attractive arena, didn’t many more funds sprout up to take advantage of the excess returns there?

I replied that there were indeed very capable competitors in this space, but that opportunities in distressed debt ebb and flow with economic cycles.

At the not infrequent moments when there is literally no distressed debt worth purchasing, these competitors especially narrowly siloed ones often stray dangerously into origination of new debt instruments at par. They are unable to sit on their hands, fearing that their businesses would wither and their people would depart.

Sometimes, the competition moves into highly subordinated junk bonds, reaching for current yield while ramping up risk. Such diversions usually end badly, leaving these competitors wounded and mostly on the sidelines when the distressed opportunity set once again becomes compelling.

For instance, Station is in the market now trying to clear a bond deal in the 60s. That is somewhat a special circumstance. More often than not, this OID will be 5ish points i. Let’s say you have a hold period of 2 years. Unfortunately, this is the very best case, and the downside in this situation 2101 a zero.

Ex the coupon, the upside downside is then 45 points up, 95 points down: Let’s take a distressed bond trading at Again the worst case is a total loss, but this is only 50 points. On the flip side, a big win would be a pull to par and possible more depending if you get cheap equity i. For simplicity less say best case is a par recovery: Doesn’t a lower bond price mean a worse credit? Absolutely not – remember price does not determine whether a company is good or bad. Market is lehter to serve you, not to guide you.


In his most recent letter to investors, Third Avenue Management’s Marty Whitman discusses this topic at length. In discussing Graham and Dodd: But a second order effect that many people miss is alluded to in the Klarman quote above which I’ll repeat again: The fact of the matter is that buying a well followed, well covered large cap stock as an individual investor that may look cheap in an overbought market could produce good relative returns i.

In my opinion, it is better to wait until market sentiment is “blood in the street” to purchase anything. If you haven’t been in that spot before, you probably can’t understand the feeling. If you do not have a sound process, you can freeze, or worse, get short, just went the opportunity set is at its ripest.

I often gets asked what my personal investment portfolio looks like. Outside of my retirement accounts, here is an approximating of my portfolio: Some of this is a function of selling some winners earlier in the month.

The two questions that will inevitably follow: As I’ve mentioned a few times on the blog before, this is the industry I am most bakpost in my ability to analyze with the deepest set of connections across the industry’s supply chain brokers, producers, adjusters as well as management teams.

I also think the insurance industry is one of the most misunderstood industries out there. Further, if you had to look at a the hedge fund’s universe of analysis of financials: I read and do a quick analysis on every public company that files for bankruptcy.

I also “riding the tide” as it were as many funds cannot invest in small bankrupt companies they can’t get any substantial size to move annuap needle and many people shrug these investments off. I’m playing against the general investment public the proliferate Yahoo! I want lftter have the liquidity to get very aggressive when the cover of the New Yorker looks like this: The corollary to an institutional investor reaching down for yield in Klarman’s quote above for an individual investor is buying a marginally cheap, marginally out of favor big cap.

Don’t be tempted to settle for marginal. But those that practice it will often be rewarded when everyone else is running for cover. Firstly, huge fan of the blog! Very curious to know whick bk equities youre invested in. I’m interested bau;ost that number is a function of your hurdle rate and position size rules, intuition, or whatever. I’ll echo the sentiment above, big fan, this was very enjoyable.


Seth Klarman Resource Page

Could you recommend funds which offer letters like the big HW’s at Oaktree? Can you please provdie example of PA postions in each of the following categories? Liquidating Bankrupt Trust cash like: Hi – Love your blogs. Could you elaborate on the statement “I also think the insurance industry is one of the most misunderstood nanual out there. What are the major misconceptions? Insurance is a very interesting area and many of them appear to look cheap. Are you evaluating them on execution based differences or something lettter along the lines of a competitive advantage, like going direct to the consumer Lettet Also, do you dig into the level of looking at how their reserves trend and comparing it to competitors?

Some of the longer tail insurers can look good according to all of the standard metrics, but when you look at them and suspect something with reserves, it can all get thrown out the window. Hunter, How do you run a search for all bankruptcy filings? Is there a function on Bloomberg or another website lstter has that information? The claims agent websites capture the big cases but how do you find the small cases?

How do you determine how much dry powder to keep at a given moment?

Have you ever considered trying to leverage into US government securities as a way to hedge equity exposure? Does anyone know lettee this part means? Can you explain better?

Below is a link the the letter http: Bonds will have make wholes where issuer needs to bupost you for the missed interest payments if they take you out early. Newer Post Older Post Home. Subscribe Subscribe in a Reader.

Seth Klarman Resource Page

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Email hunter [at] distressed-debt-investing [dot] com. About Me I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor. Disclaimer This website is about distressed debt investing.

Under no circumstances is this an offer to sell or a solicitation to buy securities discussed on this site. All data, information baupst opinions are subject to change without notice.