Monday, November 20, 2017

Private Equity's New Competition?

PE Hub posted a Reuters article, Private equity to face competition from investors, says Carlyle Co-CEO:
Private equity firms are awash in cash, with nearly US$1trn of available capital, but the industry is facing internal competition as limited partner (LP) investors seek to play a more active role in buyouts, according to David Rubenstein, co-founder and co-CEO of the Carlyle Group.

The structure and composition of private equity funds will change significantly as LPs that would previously have invested in the funds increasingly branch out into arranging buyouts themselves, Rubenstein said.

Rubenstein was giving his views on the future development of private equity firms, based on his 30-plus year career in the industry, at the SuperInvestor Conference in Amsterdam this week.

“I expect we’ll see longer duration funds become more prevalent, with consequently lower fees for LPs and carried interest for general partners [private equity firms].” Rubenstein said.

Many LPs are looking for longer-term investments with lower return targets, which will ripple through the conventional buyout community, Rubenstein said, adding that more permanent capital will also be sought to match longer investment duration needs.

Several LPs that would have previously invested in private equity funds, including Canadian pension funds PSP Investments and the Canadian Pension Plan Investment Board, have built their own operations to buy assets in recent years and some European firms are also looking at co-investment buyouts.


Rubenstein predicted that sovereign wealth funds will replace US public pension funds as the largest source of capital for buyout firms, and said that retail investors will also play a more significant role going forward.

“Individual retail investors will be the biggest new entry as regulations relax on investing in private equity,” he added.

He also highlighted private debt as a significant growth area and predicted that it could grow to rival private equity. Private debt, which includes direct lending that targets small and medium-sized companies, currently has US$600bn of assets under management, according to Preqin.

While the global private equity industry currently has nearly US$1trn of ‘dry powder’ available to spend, the breakneck development of the shadow banking market means that sponsors now form a smaller part of the investment world, other delegates said.

Rubenstein is expecting public and political opinion, which has been highly critical of private equity’s role in turning around underperforming companies via debt-financed buyouts, to relax as knowledge of how the industry works develops.

“A lot of people still don’t really understand what private equity does,” Rubenstein said.
Private equity firms are gearing up to lobby hard against proposed US tax reforms that could curb the private equity industry’s profitability and make buying and selling companies more difficult.

Rubenstein said that a proposed cap on the tax deductibility of interest payments exceeding 30% of income is unlikely to have a significant impact on private equity firms, as debt forms a smaller proportion of buyouts than in the industry’s early days.

The bill also includes a tightening of the carried interest loophole, which allows private equity managers to have their profits taxed at a lower capital gains rate than income tax rate if they hold a company for more than one year.

“I think we can expect some effect there,” he said.
Ed Ballard and William Louch of Financial News also report, David Rubenstein’s five predictions for the future of private equity:
“God looks favourably on the founders of private equity firms.” That was the conclusion of David Rubenstein as the Carlyle Group co-founder reflected on his generation's staying power, reports FN's sister publication Private Equity News.

Over the past three decades, Rubenstein has been an enduring presence as the business of buying and selling companies has transformed from a niche Wall Street practice into a gigantic industry commanding hundreds of billions of dollars and spanning asset classes.

The late phase of his career—and those of his peers such as Stephen Schwarzman, Henry Kravis and David Bonderman—is now coinciding with sweeping realignments in the industry. Addressing the SuperInvestor conference in Amsterdam, he made five predictions for the future of the buyout business.

US public pensions will lose the top spot…

Saudi Arabia’s pledge to commit $20bn to a Blackstone Group infrastructure fund may show the way the wind is blowing. “The US public pension funds … have been the biggest source of capital for PE firms for much have the past 30 years. I don’t think they will be for the next 30 years,” Rubenstein said. “I think the sovereign wealth funds and the national pension funds will replace the US public pension funds as the biggest source of equity capital.”

...and so will the US

“The biggest source of capital is from the US, the biggest deals are done in the US and more capital is invested in the US than in any other part of the world,” Rubenstein said. “This will change dramatically.” He predicted that the private equity investment will become much more balanced between developed and emerging economies.

Private credit will equal private equity

Private equity funds raised £347bn last year, far surpassing the $97bn raised by debt funds, according to Preqin. But, as Rubenstein said, “private credit is something that more or less started with the great recession...It will become as big as PE over the next 10 years in terms of dollars committed.”

Private equity firms will consolidate

Although the industry is awash with capital, there is never enough to go around. A Preqin survey published in August found four in five private equity fund managers say there is more competition for capital than there had been a year earlier, while just 1% reported a decrease. Ultimately that dynamic will force many small independent firms out of the market, Rubenstein said: “I think you’ll see some of the larger firms increase their market share due to their increased capabilities to raise capital. You’ll see more acquisitions of smaller firms and more consolidation within the industry.”

Long-term funds will become commonplace

“The business model hasn’t changed that dramatically over 30 years, PE still uses the same basic model with a few variations," Rubenstein said. "We’ll see more and more longer term funds where people hold onto capital which is invested over 10 or 15 years where they’ll take lower carry and pay no fee on committed capital.” Like several rivals including Blackstone Group and CVC Capital Partners, Carlyle has recently raised a longer-life fund as buyout firms look for ways to compete with patient investors such as pension funds. Meanwhile, specialists have sprung up such as Castik Capital and Core Equity Holdings.

Last month saw Carlyle pass the leadership torch over to a new generation when the Washington, DC-based firm announced that Rubenstein and his co-founder William Conway will become the firm's joint executive chairmen. They are being replaced as joint CEOs by Carlyle veteran Glenn Youngkin and Kewsong Lee, who joined the firm in 2013 from Warburg Pincus.

Looking back on his career, Rubenstein also recalled some notable investing mis-steps — including passing up an opportunity to invest in Facebook.
And Javier Espinoza of the Financial Times also reports, Private equity model ‘starting to look like spent force’:
The private equity model “is starting to look like a spent force” because more competition and record cash available is leading to lower returns as operators are forced to take on more risk, an adviser to the industry has said.

Professor John Colley, associate dean at Warwick Business School, said the recent collapse of British carrier Monarch Airlines and the potential surrender of UK care homes operator Four Seasons to lenders exposed a weak model of ownership.

In a recent article, Prof Colley argued that private equity’s modus operandi may have run its course, likely to hit managers but also large pension funds, which have increasingly raised their allocation to the asset class.

In the US alone the average US pension fund had 7 per cent of its asset allocation in private equity as of last year.

However, industry insiders have argued that private equity has and will continue to deliver the goods for its investors.

In Prof Colley’s article, published by The Conversation website, he wrote: “The sector is known for turning round companies, slashing costs, increasing cash flow and using debt to reduce tax and mitigate risk, but the model is now looking fragile.”

He added: “An oversupply of rival funds and investor money looking for opportunities is forcing investment in higher-risk business and the acceptance of more marginal returns.”

Prof Colley, who advises various private businesses at board level, said private equity groups were putting up with higher costs in the companies they bought partly because of high valuations in the stock market.

Because of these dynamics, he argued, “it may well be that the model has run its course and is ready to be replaced by something else”.

His comments were in stark contrast with some of the industry’s most ferocious defenders.

Speaking at a trade conference in Amsterdam, David Rubenstein, the billionaire co-founder of the Carlyle Group, said the model of private equity had worked “pretty well” for both managers and investors and that was likely to continue for the next three decades, with minor adjustments.

Mr Rubenstein said: “The basic model of [private equity] has worked. Very few business models have survived for forty years or so. The private equity model is unique in the history of money management.”

The model of asset management charged no carried interest — the cut managers share with investors — for 200 years, he said, but private equity in the 1960s changed it because “money would be committed but not actually invested and more or less 20 per cent of the profits would go to the [manager]”.

He added: “That basic business model with permutations and changes is still the model we use today. Carried interest when it is earned and realised has produced enormous amounts of profits for managers but also has led to large profits for [investors].”

Mr Rubenstein said if carried interest were to disappear the industry would not attract the talent or capital and the returns would not be as good.

“The model has worked pretty well,” he said.
Indeed, the private equity model has worked exceptionally well, allowing Mr. Rubenstein and his co-founders and other private equity titans to amass a fortune over the last three decades.

Not surprisingly, Mr. Rubenstein is defending the industry that has been so good to him (and to investors but mostly to GPs). Others are equally vocal in defense of private equity as they willfully ignore the industry's leveraged asset-stripping boom.

For those of you who don't understand how the fee structure works in private equity, it's similar to hedge funds, meaning 2% management fee and 20% carry (performance fee) with the big difference that the 2% managagement fee in private equity is typically charged on committed, not called capital, and typically declines over the life the fund (see here for more details).

Another big difference between private equity funds and hedge funds is the former charge a 20% performance fee only after clearing a hurdle rate (typically 7-8%) which is why it's a popular asset class at endowment funds like Yale and at large public pensions like CalPERS.

All those fees add up, however, which is why many large Canadian pensions have developed an extensive co-investment program where they invest in top PE funds but also co-invest with them on larger transactions to lower overall fees.

In order to do this properly, Canada's large pensions have hired experienced professionals which they pay extremely well to be able to quickly analyze co-investments and invest alongside their GPs when nice opportunities arise. This is one form of direct investing which lowers overall fees (there are no fees on co-investments but to gain access to them LPs have to invest in funds first where they pay big fees).

Another form is when the life of a PE fund comes to an end and instead of a traditional exit (ie. selling to strategic or via public markets), one or more portfolio companies are auctioned off to the highest LP bidder which can keep that company on its books for a lot longer. This too is a form of direct investing where once the company is bought by a pension, it pays no fees to the GP.

All this may sound complicated but it's also important to note private equity's J-curve effect, meaning private equity fund investments initially have negative returns and accumulated negative net cash flows for a relatively long time period, which investors have to bear in mind when setting up a new program or approving new investments.

Now, will Canada's large pensions bypass private equity funds? No, I've already explained that Canada's large pensions can never compete head-on with private equity in the best deals because the first phone call bankers and business CEOs make is to Blackstone, KKR, Carlyle, TPG and a handful of elite funds, not to CPPIB, PSP or Ontario Teachers'.

However, Canada's large pensions are increasingly sourcing some deals on their own, bypassing fees to PE funds. For example, the Ontario Teachers Pension Plan announced Friday that it has purchased the P.E.I. company Atlantic Aqua Farms, the largest grower and processor of live mussels in North America.

Now, the purchase of Atlantic Aqua Farms marks Ontario Teachers' first venture into the realm of aquaculture, and falls under its natural resources mandate to invest in the global food basket, with an eye on sustainable sources of food production, so technically it's not a private equity deal but it's still a private market deal where they're not paying any fees to a GP.

The key advantage Canada's large pensions have over private equity funds is they have a much longer investment horizon and can keep private companies generating excellent cash flows on their books for well over ten years (after 3 years of a fund's life, PE GPs are already looking to raise money for their next fund, which sometimes brings about a misalignment of interests).

And in private debt, both CPPIB and PSP Investments can compete with top private equity funds as they have hired exceptional teams working on a credit platform (so they get paid exceptionally well) which only focuses in this area.

Now, KKR, Blackstone and other large private equity shops are finding ways to lock up client money for longer, but Carlyle doesn’t seem to be in a rush to do the same:
The private equity behemoth, where co-founder Rubenstein is the chief fundraiser, can revisit investor wallets with relative ease, he said Tuesday.

“We have a pretty good ability to get capital when we need it and we really haven’t struggled to raise capital in any recent time,” Rubenstein told investors and analysts while discussing third-quarter results. “We are always looking at different permutations of how you can raise capital, but I’d say right now the model that we have is one that we’re reasonably comfortable with.”

Long-dated and permanent-capital vehicles can reduce the frequency of fundraising, permit longer investments in assets worth holding on to, and generate more predictable fees. Carlyle does have a longer-life private equity fund, championed by co-CEO designate Kewsong Lee. The pool is doing “quite well” and will likely have a larger successor fund, Rubenstein said.

But the appeal to Carlyle doesn’t seem to be as great as, say, at KKR, where a new pair of long-term investor agreements was the centerpiece of the firm’s earnings call last week. The partnerships secured $7 billion in fresh capital.

“When you have a reputation as we do, and as other peers that we compete with do, and you go out and raise a successor buyout fund, while you have to go out and raise it, it’s -- I won’t call it permanent capital -- but it’s very likely you can raise these funds for quite some time into the future,” said Rubenstein.
The appeal of permanent capital to investors is they can commit more for longer and obtain lower fees and Carlyle might not be in a rush but it will follow suit (see above, second article).

Anyway, Mr. Rubestein, Mr. Conway and Mr. D'Aniello are passing the torch now so they aren't going to be running the day-to-day operations at the world's most connected private equity fund.

Carlyle will hand its incoming co-chief executive officers bonuses and stock that will add several million dollars to their annual base salary of $275,000 (now you know why Mark Jenkins left CPPIB to join Carlyle and why one senior infrastructure officer at OMERS is joining Blackstone to help them with their new infrastructure fund which will be headed up by ex-General Electric exec Steve Bolze).

So maybe there is some truth, private equity has some big competitors in the pension space, but let's not forget who the real kingpins are and who has the deep pockets to attract top talent to their shops (remember what Mark Wiseman once told me: "If I could hire and pay David Bonderman, I would, but I can't, so in private equity, we will always pay fees and co-invest with top funds").

David Rubenstein, co-CEO of Carlyle Group, recently discussed the company's succession plan, on "Bloomberg Markets: Middle East" from the Saudi Future Investment Initiative in Riyadh. Watch this interview here.

Below, CNBC's Joe Kernen reports Carlyle Group announces a significant change in leadership as both David Rubenstein and William Conway are giving up their roles effective January. Read more about this succession plan here.

Friday, November 17, 2017

A Conversation with David Swensen?

Janet Lorin and Christine Harper of Bloomberg report, Yale's Swensen Sees Low Volatility as `Profoundly Troubling':
David Swensen, Yale University’s longtime chief investment officer, said the lack of market volatility in the current geopolitical environment is a major concern and warned that another crash is possible.

“When you compare the fundamental risks that we see all around the globe with the lack of volatility in our securities markets, it’s profoundly troubling,” Swensen, 63, said Tuesday during remarks at the Council on Foreign Relations in New York. That “makes me wonder if we’re not setting ourselves up for an ’87, or a ’98 or a 2008-2009,” he said, referring to previous market crises.

“The defining moments for portfolio management” came in those years, “and if you ignore that you’re not going to be able to manage your portfolio,” Swensen said.

The investment chief, who was interviewed by former U.S. Treasury Secretary Robert Rubin, also said he’s expecting lower returns for the university’s endowment, which he’s run for 32 years with a 13.5 percent average annual rate of return.

For the past 12 to 18 months, Swensen said he has been warning university officials to expect much lower returns in the future, as little as 5 percent annually, which would be down from previous assumptions of 8.25 percent.

“It’s not a very popular change,” he said. “We’re victims of our own success.”

‘Strategic Positions’

Swensen’s widely copied strategy of shifting away from U.S. stocks to alternatives including private equity has generated billions of dollars in gains for the school in New Haven, Connecticut. The fund reached a record of $27.2 billion as of midyear.

“We have to take strategic positions in the portfolio,” Swensen told an overflow crowd. “One of the most important metrics that we look at is the percentage of the portfolio that’s in what we call uncorrelated assets, and that’s a combination of absolute return, cash and short-term bonds. Those are the assets that would protect the endowment in the event of a market crisis.”

Asked why Yale’s uncorrelated assets are higher now than in 2008, he said, "I’m not worried about the economy so much, what I’m concerned about is valuation."
Janet Lorin of Bloomberg also reports that Mr. Swensen talked about China, quants, and manager selection:
Yale University chief investment officer David Swensen, in a rare public appearance, spoke Tuesday to former U.S. Treasury Secretary Robert Rubin at the Council on Foreign Relations.

During the hour-long session, Swensen, 63, disclosed that annualized returns over his 32-year tenure have been 13.5 percent, higher than the endowment’s assumption of 8.25 percent a year.

Swensen said he favors private equity and doesn’t like quants, and talked about his efforts to get university officials to lower expectations for future returns. The endowment has swelled to a record $27.2 billion, the second-largest in U.S. higher education.

During the interview, Swensen shared thoughts about investing and opportunities:
  • On where to invest: “The types of questions that you need to ask with respect to where you are investing are the bedrock for putting together your asset allocation. When I look around the world, there are places that we just won’t invest. Russia. If the rule of law does not follow, then do you know whether or not you own anything? And if you don’t know whether or not you own it, then why would you put your funds there? As we look around the world in spite of the problems we face in the United States, this is one of the best environments in which to invest. I think that the breadth of emerging markets that we were interested in 20 years ago has narrowed dramatically.”
  • On China: His level of concern about China has been “pretty constant” over the past 12 or 18 months. “China is an area that makes me incredibly nervous, but at the same time, we’re heavily committed there. I’ve had great relationships with a handful of managers in China that have produced extraordinary returns. The party commitment to capitalism doesn’t seem as steadfast as I might have thought five or ten years ago.”
  • On private and public markets: Private equity “where you buy the company, you make the company better and then you sell the company is as a superior form of capitalism. I’m really concerned about what’s going on in our public markets. The short-termism is incredibly damaging. There’s this focus on quarter-to-quarter earnings. There’s this focus whether you are a penny short or a penny above the estimate. There’s this activist mentality that permeates the markets.”
  • On quants: “I’ve never been a big fan of quantitative approaches to investing and the fundamental reason is that I can’t understand what’s in the black box. And if don’t know what’s in the black box and there’s under-performance, I don’t know if the black box is broken or if it’s out of favor. If it’s broken you want to stop and if it’s out of favor, we want to increase exposure. And so, I’m an old-fashioned guy that wants to sit across the table from somebody who’s done the analysis and understand why they own the position.”
  • On manager selection: Swensen has long attributed much of his success to the selection of managers for their character and the quality of investment principles. The test for character is “subjective, a gut feeling.” He tries to spend time with prospective managers in a social setting when making evaluations. “Track records are really overrated,” Swensen said. “We would miss out on some incredible investment opportunities if we required three or five years of audited returns before backing somebody.”
I love that last part on manager selection, he's so right. David Swensen is a god in the endowment fund world, and for good reason. He holds the longest, most enviable track record among his peers and he has literally authored the book on pioneering portfolio management.

So when Swensen speaks, you'd better listen and listen carefully. Do I agree with everything he says? Of course not, my name is Leo Kolivakis and I've got my own opinions on markets and the economy but I agree with a lot of the points he raises:
  • On low volatility: Since the summer, I've been warning you the silence of the VIX won't last forever, and when vol picks up, many traders jumping on the short global vol trade are going to be screaming like lambs to the slaughter. When volatility spikes and stays high, it will crush many unsuspecting fools who keep buying exchange-trade products betting that volatility will sink lower. Now is not the time to be picking up dimes in front of a steamroller. 
  • On public versus private markets: Swensen loves private equity and I don't blame him. It has been a great asset class for Yale and other institutional investors but I'm much more tempered in my enthusiasm and have taken on those who defend the industry at all cost, stating much of the outperformance in private equity is due to leveraged asset-stripping. In public markets, I share Swensen's concerns on short-termism but I'm also concerned on valuations as euphoria keeps creeping into these markets, no thanks to the universal shift into passive investing and global central banks who refuse to let markets go down. I've been warning my readers that markets are on the edge of a cliff, it's as good as it gets for stocks and if credit markets keep deteriorating and a crisis develops, we are going to experience the worst bear market ever. This won't bode well for public or private markets.
  • On China: Unlike Swensen, I'm very worried about deflation headed for the US and what will happen when the bubble economy bursts. Importantly, I don't see any "baffling" inflation-deflation mystery, think deflation remains the clear and present danger, and I'm dismayed at smart people who think a major reversal in inflation is upon us. As such, I'm short emerging market stocks (EEM) and Chinese shares (FXI). Because of deflation, I'm also short oil (USO), energy (XLE), metals and mining (XME) and financials (XLF) and remain long and strong good old boring US bonds (TLT), the ultimate diversifier in these insane markets. 
  • On quants and manager selection: I understand Swensen's healthy skepticism on quants taking over the world but there's no denying this trend has been going on for a while and will likely persist. Just because you can't understand the black box, it doesn't mean you can't invest in it. Maybe put them on a managed account platform and monitor and control the risk more carefully. As far as manager selection, he's spot on, you need to look way past track record, get a gut feeling for a potential manager and run with it. You won't always be right but so what, it's an art, not science.
Speaking of art, I had to chuckle this week when I learned Leonardo Da Vinci's Salvator Mundi smashed an auction record, selling for $450 million (click on image):

Too much money, with too few brains chasing too few deals. I didn't say it first, Trump's friend did when he sold his real estate holdings way before the 2008 meltdown. He might have gotten out too early but he had the sense to get out.

And that's the moral of the story. Markets can keep setting records and they can stay irrational longer than you or I can stay solvent, but at one point the music will stop and it will hurt a generation of investors.

Are there intelligent risks to take? Sure, you can track what top funds are buying and selling but that's not going to guarantee you great returns because the more risk you take, the more volatility you will need to endure and it's fun when liquidity is plentiful but not so much when it dries up.

Nevertheless, it's Friday and US Thanksgiving is next week, so let me share with you some stocks that moved up nicely on my watch list today, and they're not just biotechs (click on image):

You can track more of my investment ideas on StockTwits here but to be honest, I don't have the time to post every stock I'm looking at.

I also want to let my readers know that I updated my comment on CalPERS doubling its bond allocation to include Monday's Investment Committee clips and earlier today, I spoke with OPTrust's President and CEO, Hugh O'Reilly, on that pension's decision to divest from big tobacco. You can read his comments at the end of that comment in an update here.

As a reminder, I don't get paid for sharing my wisdom on pensions and investments. In fact, I'm grossly underpaid for all the work that goes into this blog so I kindly remind everyone regularly reading my comments to please take the time to donate via PayPal on the top right-hand side under my picture (view web version on your smartphone).

I want to sincerely thank all of you who financially support my efforts, it's truly appreciated.

Below, a conversation with David Swensen. Take the time to listen to him, Yale and Harvard weren't the top-performing endowment funds last fiscal year but he's a very wise man who had one of my favorite economists, James Tobin, as his mentor.

I particularly like his bleak assessment of America’s looming retirement crisis around minute 40 and how he then slams US public pensions who justify a discount rate of 7.5 percent when he thinks they should be using the 10-year bond yield plus 50 basis points (roughly 3 percent).

I guess he's unaware the Mother of all US pension bailouts is in the works right now which makes the debate on discount rates obsolete.

Thursday, November 16, 2017

Norway's Fund Jolts Energy and FX Markets?

Wednesday, November 15, 2017

Top Funds' Activity in Q3 2017?

Julia La Roche of Yahoo Finance reports, Here's what the biggest hedge funds have been buying and selling:
The stock moves that the biggest hedge fund managers made in the third quarter are being revealed today.

Hedge funds of a certain minimum size are required to disclose their long stock holdings in filings to the SEC known as 13-Fs. Of course, the filings only provide a partial picture since they do not show short positions or wagers on commodities and currencies. What’s more is these filings come out 45 days after the end of each quarter, so it’s possible they could have traded in and out of the positions.

Still, it does provide a partial look into where some of the top money managers have been placing money in the stock market.

The stock moves that the biggest hedge fund managers made in the third quarter are being revealed today.

Appaloosa Management (David Tepper)
New: Micron Technology (MU)
Boosted: Facebook (FB)
Trimmed: Allergan (AGN)
Exited: Wells Fargo (WFC)

Baupost Group (Seth Klarman)
New: McKesson (MCK), AMC Entertainment (AMC)
Boosted: Allergan, Cardinal Health (CAH), Antero Resources (AR)
Trimmed: Dell Technologies (DVMT), Avis Budget (CAR)
Exited: Qualcomm (QCOM)

Bridgewater Associates (Ray Dalio)
Boosted: SPDR Gold Shares (GLD), Vanguard FTSE Emerging Markets ETF (VWO)
Trimmed: SPDR S&P 500 ETF (SPY), Intel (INTC)

Coatue Management (Philippe Laffont)
New: Tableau Software (DATA)
Boosted: Apple (AAPL), Alibaba (BABA), Shopify (SHOP), Snap Inc. (SNAP)
Trimmed: Symantec (SYMC)
Exited: Disney (DIS), eBay (EBAY)

Duquesne Capital (Stanley Druckenmiller)
New: Citigroup (C), Netflix (NFLX), and Nvidia (NVDA)
Boosted:, Salesforce (CRM), WorkDay (WDAY), Alphabet
Exited: Delta (DAL), American Airlines (AAL)

JANA Partners (Barry Rosenstein)
New: Jack In The Box (JACK)
Exited: Hewlett-Packard (HPE)

Marcato Capital (Mick McGuire)
New: Itron (ITRI)
Boosted: Terex Corporation (TEX)
Trimmed: IAC/ InteractiveCorp (IAC), Sotheby’s (BID)

Omega Advisors (Leon Cooperman)
New: Aetna (AET), Expedia (EXPE)
Boosted: AMC Networks (AMCX)
Exited: Allergan

Passport Capital (John Burbank)
New: Tahoe Resources (TAHO)
Boosted: Alibaba, Altaba, Amazon (AMZN)
Trimmed: Advanced Micro Devices (AMD)
Exited: Facebook

Third Point LLC (Daniel Loeb)
New: Altaba (AABA), Shire (SHPG)
Boosted: Alibaba (BABA)
Trimmed: Alphabet (GOOGL)
Exited: Humana (HUM), Charter Communications (CHTR)

Tiger Global (Chase Coleman)
New: Corp (DESP), RedFin (RDFN)
Boosted: Netflix (NFLX), Facebook (FB)
Trimmed: Teladoc (TDOC)
Exited: Alphabet (GOOG, GOOGL), American Tower (AMT)

Tiger Management (Julian Robertson)
New: Anthem (ANTM), (JD)
Boosted: Facebook, JPMorgan (JPM)
Trimmed: Celgene (CELG)
Exited: Teva (TEVA), Priceline (PCLN), Nike (NKE)
Before I get to what top funds bought and sold last quarter, I must tell you, I'm very busy in the mornings focusing all my attention on my watch list and certain stocks (click on image):

"Leo, we don't care about your watch list which moves up and down like a yo-yo, we want to know what Soros and company bought and sold last quarter."

Well, let me be frank with you, I don't care what Soros and company bought and sold last quarter and because you're not paying me enough to do this blog, I have to focus my attention on making money day in, day out.

More importantly, these are not markets to take big risks. Period. You can trade in and out of positions but you need to be really good and even then, you can get killed.

I try to post some of my thoughts on Stocktwits but there's no time, and when I'm trading and concentrating, I need all my attention because things move fast.

For example, one of the stocks on my watch list, Calithera Biosciences (CALA), took a nosedive this week and hit a low of $8.80 a share at around 3:20 yesterday before coming back strong this morning (click on image):

Why is this biotech on my watch list? Because a big hedge fund I like, Viking Global, owns a big stake in it and it has been on my watch list ever since it initiated a position.

Moreover, another big hedge fund I track closely, Adage Capital, also has a big position in this biotech. So, this morning, I watched it like a hawk, waited for biotechs (XBI) to rebound and then almost hit the trigger.

“Almost hit the trigger? What kind of a trader are you?!? That was an easy 8% right there!! Get out of US long bonds (TLT) and pull the trigger!!! Stevie Cohen would have fired you if he saw you not taking enough risk!!”

Well, I don’t answer to Stevie Cohen or anyone else, only to the man in the mirror and right now, I don't like these markets at all and even wrote on Stocktwits that we need to see a significant pullback in the S&P 500 right back to its 200-week moving average and lower (click on image)

"But that chart is so bullish, so beautiful, the trend is your friend, just buy MOAR STAWKS!"

Hold your horses Kimosabe, I've traded long enough and have gotten my head handed to me (literally) on a few occasions to know when to dial up risk and when to dial it down.

For example, right before the US elections, I told you to LOAD UP on biotechs (XBI) stating it was America's biotech, not Brexit moment.

Of course, back then, all my buddies were laughing at me, thinking I was nuts but they stopped laughing after they saw biotechs explode up. I can't blame them, most people would never trade the way I trade, nor do I recommend it because it's way too risky and volatile.

But the thing I keep emphasizing is to understand the macro environment first and foremost, then trade around it.

A couple of days ago when I discussed why CalPERS is considering more than doubling its bond allocation, I stated this:
[...] you know my market views. I'm openly worried about deflation hitting the US and my most recent market comments tell you that I think it's wise to take some risk off the table:
Moreover, I don't foresee a big reversal in inflation, and openly worry many market participants still don't get the "baffling" mystery of inflation-deflation.

I have also repeatedly stated on my blog to load up on US long bonds (TLT) on any backup in yields because when the bubble economy bursts and the next deflation tsunami and financial crisis hit us, it will bring about the worst bear market ever.

Of course, central banks know all this which is why the Fed has signaled it's preparing for QE infinity, something which I fundamentally believe is a foregone conclusion, which can explain pockets of speculative activity in the stock market.
I forgot to mention you need to be extra vigilant navigating through these prickly markets or else that big cactus will come back to haunt you for a long, long time.

I've said it before but it's worth mentioning again, my top three macro conviction trades going forward:
  1. Load up on US long bonds (TLT) while you still can before deflation strikes the US. This remains my top macro trade on a risk-adjusted basis.
  2. A few months ago I said it's time to start nibbling on the US dollar (UUP) and it continued to decline but I think the worst is behind us, and if a crisis strikes, everyone will want US assets, especially Treasuries. I'm particularly bearish on the Canadian dollar (FXC) and would use its appreciation this year to load up on US long bonds (TLT).
  3. My third macro conviction trade is to underweight/ short oil (USO), energy (XLE) and metals and mining (XME) as the global economy slows. Sell commodity indexes and currencies too. I'm also short emerging market stocks (EEM) and bonds (EMB).
Basically, I'm not buying the global reflation nonsense and think it's best to reduce risk and trade very actively here if you're going to take risks because the overall macro environment is deteriorating fast.

Now, what are the top funds doing? Are there any interesting moves worth noting? Sure, I noticed that Julian Robertson cut his big losses in Teva Pharmaceuticals (TEVA) last quarter but David Abrams, the one-man wealth machine, initiated a new position last quarter right before the stock got slammed hard a few weeks ago (click on image):

Now, Teva's shares are up nicely today but I can tell you from experience, that's not a chart you want to buy, more often than not, you will be disappointed (it is oversold but can become even more oversold).

And while David Abrams and his mentor Seth Klarman are great value investors, when it comes to timing, they're far from perfect. They have both been sitting on shares of Keryx Biopharmaceuticals (KERX) for a long time and they're losing money on them so far.

Still, these guys have conviction, they're excellent value investors who don't typically churn their portfolio, so if they're accumulating a position, it's worth paying attention.

As you click on the links below to each fund, you will be taken directly to their top holdings. I want you to stop looking at this information in a vacuum. Think about the macro environment and risks in these markets first.

Then, have fun looking at their top holdings, where they increased, where they reduced, start educating yourselves on how to draw daily and weekly charts for free on StockCharts using very simple moving averages at first (50, 100, 200 day or week) and start thinking whether there are risks worth taking on the long and short side.

"Leo, I want to learn to trade like you, can you teach me and give me a list of all the stocks you track and share more of your wisdom?".

No, I can't, it's too cumbersome and your risk tolerance definitely won't match mine. I also share way too much here and on Stocktwits.

All I can tell you is analyzing and trading markets and stocks is a passion of mine. I regularly look at the YTD performance of stocks, the 12-month leaders, the 52-week highs and 52-week lows. I also like to track the most shorted stocks and highest yielding stocks in various exchanges and I have a list of stocks I track in over 100 industries/ themes to see what is moving in real time.

When I tell you these aren't the markets you want to be playing in, I know exactly what I'm talking about because I'm watching these markets closely every day and my deflationary macro call looms large and is weighing on on all risk assets, not just stocks.

These ARE NOT the markets you want to be making any bullish or contrarian bets on. Trust me when I tell you global deflation will obliterate all risk assets and the only refuge will be in US long bonds (TLT).

Still, if you want to find hidden gems and take some risks, have fun looking at the third quarter activity of top funds listed below (click on links and then click on the fourth column head, % chg, to see where they descreased and increased their holdings).

Top multi-strategy and event driven hedge funds

As the name implies, these hedge funds invest across a wide variety of hedge fund strategies like L/S Equity, L/S credit, global macro, convertible arbitrage, risk arbitrage, volatility arbitrage, merger arbitrage, distressed debt and statistical pair trading.

Unlike fund of hedge funds, the fees are lower because there is a single manager managing the portfolio, allocating across various alpha strategies as opportunities arise. Below are links to the holdings of some top multi-strategy hedge funds I track closely:

1) Citadel Advisors

2) Balyasny Asset Management

3) Farallon Capital Management

4) Peak6 Investments

5) Kingdon Capital Management

6) Millennium Management

7) Eton Park Capital Management

8) HBK Investments

9) Highbridge Capital Management

10) Highland Capital Management

11) Pentwater Capital Management

12) Och-Ziff Capital Management

13) Pine River Capital Capital Management

14) Carlson Capital Management

15) Magnetar Capital

16) Mount Kellett Capital Management 

17) Whitebox Advisors

18) QVT Financial 

19) Paloma Partners

20) Weiss Multi-Strategy Advisors

21) York Capital Management

Top Global Macro Hedge Funds and Family Offices

These hedge funds gained notoriety because of George Soros, arguably the best and most famous hedge fund manager. Global macros typically invest across fixed income, currency, commodity and equity markets.

George Soros, Carl Icahn, Stanley Druckenmiller, Julian Robertson and now Steve Cohen have converted their hedge funds into family offices to manage their own money and basically only answer to themselves (that is my definition of true investment success).

1) Soros Fund Management

2) Icahn Associates

3) Duquesne Family Office (Stanley Druckenmiller)

4) Bridgewater Associates

5) Pointstate Capital Partners 

6) Caxton Associates (Bruce Kovner)

7) Tudor Investment Corporation

8) Tiger Management (Julian Robertson)

9) Moore Capital Management

10) Point72 Asset Management (Steve Cohen)

11) Bill and Melinda Gates Foundation Trust (Michael Larson, the man behind Gates)

12) Joho Capital (Robert Karr, a super succesful Tiger Cub who shut his fund in 2014)

Top Market Neutral, Quant and CTA Hedge Funds

These funds use sophisticated mathematical algorithms to make their returns, typically using high-frequency models so they churn their portfolios often. A few of them have outstanding long-term track records and many believe quants are taking over the world. They typically only hire PhDs in mathematics, physics and computer science to develop their algorithms. Market neutral funds will engage in pair trading to remove market beta.

1) Alyeska Investment Group

2) Renaissance Technologies

3) DE Shaw & Co.

4) Two Sigma Investments

5) Numeric Investors

6) Analytic Investors

7) Winton Capital Management

8) Graham Capital Management

9) SABA Capital Management

10) Quantitative Investment Management

11) Oxford Asset Management

12) PDT Partners

13) Princeton Alpha Management

Top Deep Value,
Activist, Event Driven and Distressed Debt Funds

These are among the top long-only funds that everyone tracks. They include funds run by legendary investors like Warren Buffet, Seth Klarman, Ron Baron and Ken Fisher. Activist investors like to make investments in companies where management lacks the proper incentives to maximize shareholder value. They differ from traditional L/S hedge funds by having a more concentrated portfolio. Distressed debt funds typically invest in debt of a company but sometimes take equity positions.

1) Abrams Capital Management (the one-man wealth machine)

2) Berkshire Hathaway

3) Baron Partners Fund (click here to view other Baron funds)

4) BHR Capital

5) Fisher Asset Management

6) Baupost Group

7) Fairfax Financial Holdings

8) Fairholme Capital

9) Trian Fund Management

10) Gotham Asset Management

11) Fir Tree Partners

12) Elliott Associates

13) Jana Partners

14) Gabelli Funds

15) Highfields Capital Management 

16) Eminence Capital

17) Pershing Square Capital Management

18) New Mountain Vantage  Advisers

19) Atlantic Investment Management

20) Scout Capital Management

21) Third Point

22) Marcato Capital Management

23) Glenview Capital Management

24) Apollo Management

25) Avenue Capital

26) Armistice Capital

27) Blue Harbor Group

28) Brigade Capital Management

29) Caspian Capital

30) Kerrisdale Advisers

31) Knighthead Capital Management

32) Relational Investors

33) Roystone Capital Management

34) Scopia Capital Management

35) Schneider Capital Management

36) ValueAct Capital

37) Vulcan Value Partners

38) Okumus Fund Management

39) Eagle Capital Management

40) Sasco Capital

41) Lyrical Asset Management

42) Gabelli Funds

43) Brave Warrior Advisors

44) Matrix Asset Advisors

45) Jet Capital

46) Conatus Capital Management

47) Starboard Value

48) Pzena Investment Management

Top Long/Short Hedge Funds

These hedge funds go long shares they think will rise in value and short those they think will fall. Along with global macro funds, they command the bulk of hedge fund assets. There are many L/S funds but here is a small sample of some well-known funds.

1) Adage Capital Management

2) Appaloosa LP

3) Greenlight Capital

4) Maverick Capital

5) Pointstate Capital Partners 

6) Marathon Asset Management

7) JAT Capital Management

8) Coatue Management

9) Omega Advisors (Leon Cooperman)

10) Artis Capital Management

11) Fox Point Capital Management

12) Jabre Capital Partners

13) Lone Pine Capital

14) Paulson & Co.

15) Bronson Point Management

16) Hoplite Capital Management

17) LSV Asset Management

18) Hussman Strategic Advisors

19) Cantillon Capital Management

20) Brookside Capital Management

21) Blue Ridge Capital

22) Iridian Asset Management

23) Clough Capital Partners

24) GLG Partners LP

25) Cadence Capital Management

26) Karsh Capital Management

27) New Mountain Vantage

28) Andor Capital Management (it shut down again, for now)

29) Silver Point Capital

30) Steadfast Capital Management

31) Brookside Capital Management

32) PAR Capital Capital Management

33) Gilder, Gagnon, Howe & Co

34) Brahman Capital

35) Bridger Management 

36) Kensico Capital Management

37) Kynikos Associates

38) Soroban Capital Partners

39) Passport Capital

40) Pennant Capital Management

41) Mason Capital Management

42) Tide Point Capital Management

43) Sirios Capital Management 

44) Hayman Capital Management

45) Highside Capital Management

46) Tremblant Capital Group

47) Decade Capital Management

48) T. Boone Pickens BP Capital 

49) Bloom Tree Partners

50) Cadian Capital Management

51) Matrix Capital Management

52) Senvest Partners

53) Falcon Edge Capital Management

54) Park West Asset Management

55) Melvin Capital Partners

56) Owl Creek Asset Management

57) Portolan Capital Management

58) Proxima Capital Management

59) Tiger Global Management

60) Tourbillon Capital Partners

61) Impala Asset Management

62) Valinor Management

63) Viking Global Investors

64) Marshall Wace

65) Light Street Capital Management

66) Honeycomb Asset Management

67) Whale Rock Capital

70) Suvretta Capital Management

71) York Capital Management

72) Zweig-Dimenna Associates

Top Sector and Specialized Funds

I like tracking activity funds that specialize in real estate, biotech, healthcare, retail and other sectors like mid, small and micro caps. Here are some funds worth tracking closely.

1) Armistice Capital

2) Baker Brothers Advisors

3) Palo Alto Investors

4) Broadfin Capital

5) Healthcor Management

6) Orbimed Advisors

7) Deerfield Management

8) BB Biotech AG

9) Ghost Tree Capital

10) Sectoral Asset Management

11) Oracle Investment Management

12) Perceptive Advisors

13) Consonance Capital Management

14) Camber Capital Management

15) Redmile Group

16) RTW Investments

17) Bridger Capital Management

18) Boxer Capital

19) Bridgeway Capital Management

20) Cohen & Steers

21) Cardinal Capital Management

22) Munder Capital Management

23) Diamondhill Capital Management 

24) Cortina Asset Management

25) Geneva Capital Management

26) Criterion Capital Management

27) Daruma Capital Management

28) 12 West Capital Management

29) RA Capital Management

30) Sarissa Capital Management

31) SIO Capital Management

32) Senzar Asset Management

33) Southeastern Asset Management

34) Sphera Funds

35) Tang Capital Management

36) Thomson Horstmann & Bryant

37) Venbio Select Advisors

38) Ecor1 Capital

39) Opaleye Management

40) NEA Management Company

Mutual Funds and Asset Managers

Mutual funds and large asset managers are not hedge funds but their sheer size makes them important players. Some asset managers have excellent track records. Below, are a few funds investors track closely.

1) Fidelity

2) Blackrock Fund Advisors

3) Wellington Management

4) AQR Capital Management

5) Sands Capital Management

6) Brookfield Asset Management

7) Dodge & Cox

8) Eaton Vance Management

9) Grantham, Mayo, Van Otterloo & Co.

10) Geode Capital Management

11) Goldman Sachs Group

12) JP Morgan Chase & Co.

13) Morgan Stanley

14) Manulife Asset Management

15) RCM Capital Management

16) UBS Asset Management

17) Barclays Global Investor

18) Epoch Investment Partners

19) Thornburg Investment Management

20) Legg Mason (Bill Miller)

21) Kornitzer Capital Management

22) Batterymarch Financial Management

23) Tocqueville Asset Management

24) Neuberger Berman

25) Winslow Capital Management

26) Herndon Capital Management

27) Artisan Partners

28) Great West Life Insurance Management

29) Lazard Asset Management 

30) Janus Capital Management

31) Franklin Resources

32) Capital Research Global Investors

33) T. Rowe Price

34) First Eagle Investment Management

35) Frontier Capital Management

36) Akre Capital Management

37) Brandywine Global

38) Brown Capital Management

Canadian Asset Managers

Here are a few Canadian funds I track closely:

1) Addenda Capital

2) Letko, Brosseau and Associates

3) Fiera Capital Corporation

4) West Face Capital

5) Hexavest

6) 1832 Asset Management

7) Jarislowsky, Fraser

8) Connor, Clark & Lunn Investment Management

9) TD Asset Management

10) CIBC Asset Management

11) Beutel, Goodman & Co

12) Greystone Managed Investments

13) Mackenzie Financial Corporation

14) Great West Life Assurance Co

15) Guardian Capital

16) Scotia Capital

17) AGF Investments

18) Montrusco Bolton

19) Venator Capital Management

Pension Funds, Endowment Funds, and Sovereign Wealth Funds

Last but not least, I the track activity of some pension funds, endowment and sovereign wealth funds. I like to focus on funds that invest in top hedge funds and have internal alpha managers. Below, a sample of pension and endowment funds I track closely:

1) Alberta Investment Management Corporation (AIMco)

2) Ontario Teachers' Pension Plan

3) Canada Pension Plan Investment Board

4) Caisse de dépôt et placement du Québec

5) OMERS Administration Corp.

6) British Columbia Investment Management Corporation (bcIMC)

7) Public Sector Pension Investment Board (PSP Investments)

8) PGGM Investments

9) APG All Pensions Group

10) California Public Employees Retirement System (CalPERS)

11) California State Teachers Retirement System (CalSTRS)

12) New York State Common Fund

13) New York State Teachers Retirement System

14) State Board of Administration of Florida Retirement System

15) State of Wisconsin Investment Board

16) State of New Jersey Common Pension Fund

17) Public Employees Retirement System of Ohio

18) STRS Ohio

19) Teacher Retirement System of Texas

20) Virginia Retirement Systems

21) TIAA CREF investment Management

22) Harvard Management Co.

23) Norges Bank

24) Nordea Investment Management

25) Korea Investment Corp.

26) Singapore Temasek Holdings 

27) Yale Endowment Fund

Below, Dan Loeb's Third Point files its 13F, which shows the company eliminated its stake in Hewlett Packard Enterprise, decreased its stake in Alphabet, and increased its Alibaba, reports CNBC's Leslie Picker.

And CNBC's Seema Mody reports the number of hedge funds trading cryptocurrencies has exploded since the start of the year. Even hedge fund juggernaut Man Group is jumping on the cryptocurrency frenzy.

I don't know, what's that old saying, if it quacks like a duck... -:)

Dan Loeb's Third Point files 13F from CNBC.