Friday, February 17, 2017

Top Funds Activity in Q4 2016

Katherine Burton, Simone Foxman and Katia Porzecanski of Bloomberg report, Hedge Funds Boost Financials, Trim Tech and Other 13F Highlights:
Hedge fund managers jumped on the Trump train in the last three months of 2016, boosting their stakes in financial companies and reducing their holdings in technology firms.

Financial institutions have risen 22 percent since Donald Trump won the U.S. presidential election on Nov. 8, on optimism that his administration will reduce regulations, cut taxes and spur deal making. Shares of Goldman Sachs Group Inc. hit a record high Tuesday. Technology shares, meanwhile have risen just 9.3 percent since the election, as measured by the S&P 500 Information Technology Index, about the same as the overall market.

The biggest new buys at Stephen Mandel’s Lone Pine Capital in the fourth quarter included a $493 million purchase in PayPal Holdings Inc., a $491 million stake in PNC Financial Services Group Inc. and a $479 million stake in Bank of America Corp, according to government filings Tuesday. Louis Bacon’s Moore Capital Management increased its exposure to financials and lenders including a new $94 million position in the exchange-traded Financial Select Sector SPDR Fund.

The sector accounted for a third of the firm’s U.S. equity holdings at the end of the year. Tudor Investment Corp. continued to boost its stake in financial companies to 26 percent of its equity allocation from about 15 percent a year ago.

Bullish on Banks

The value of hedge fund stakes mostly rose in the fourth quarter on the promise of less regulation and more fiscal spending (click on image).

By comparison, the reduction in holdings of tech companies by several firms was a reversal from the third quarter, when many of the marquee money managers added to their holdings in expectation of a Hillary Clinton win helping the industry.

In the fourth quarter, Third Point, Millennium Management, Melvin Capital Management and Moore Capital were among firms that slashed their stakes in Facebook Inc. Viking Global Investors decreased its stake in Inc. by $1.23 billion. Shares of the online retailer fell about 10 percent last quarter.

Apple Inc., long a hedge fund favorite, lost the love of Chase Coleman’s Tiger Global Management and Aaron Cowen’s Suvretta Capital Management. The two firms sold out of their stakes, worth $407.6 million and $293.9 million at the end of last year, respectively. Coatue Management, the technology-focused hedge fund led by Philippe Laffont, halved its position, leaving it with 3.2 million shares as of Dec. 31.

Bearish on Tech

The value of hedge fund stakes mostly fell in the fourth quarter on concerns that immigration restrictions would set back hiring (click on image).

Och-Ziff Capital Management Group LLC, Discovery Capital Management and PointState Capital were also among funds that cut holdings of gaming company Activision Blizzard Inc. during the fourth quarter as holiday video-game sales disappointed.

One exception to the tech selloff was Jana Partners and Sachem Head Capital Management bought 3.2 million and 2.1 million shares, respectively, during the quarter.

In contrast to many industry peers, George Soros’s family office added a new position in Facebook, and increased its stake in Alphabet Inc. and Netflix Inc., but it exited Intel Corp. and some other technology companies.

While Time Warner Inc. and AT&T Inc. announced one of the year’s biggest deals during the fourth quarter, most managers declined to bet on its completion through risk-arbitrage trades. One possible reason: Trump in a campaign speech vowed to block the takeover on the same day it was unveiled by the two companies. 

Even managers who did bet on the deal’s completion did so in relatively small doses. Paulson & Co. bought 2.86 million Time Warner shares during the fourth quarter, while Third Point acquired 3 million shares and Abrams Capital Management purchased 3.05 million, according to filings.

Paulson also cut its stake again in insurer American International Group Inc.

Even as the future of health-care stocks have been less clear since Trump’s victory, David Tepper’s Appaloosa Management added to investments in the sector. His largest new buys were in Teva Pharmaceutical Industries Ltd., Pfizer Inc. and Mylan NV. He also added to his holding in Allergan Plc, which was worth almost $900 million at the end of the quarter.
David Randall of Reuters also reports, Bets on financials, pharma power U.S. hedge funds' strong start to year:
Several big-name U.S. hedge fund investors in the fourth quarter moved significant parts of their portfolios into financial and pharmaceutical stocks that are expected to benefit under the Trump administration, helping to power the sector to its best January performance in four years.

Omega Advisors, run by Leon Cooperman and Steven Einhorn, increased its stake in insurance broker Fidelity & Guaranty Life by 343 percent compared with the quarter before, and added a new position in regional bank Renasant Corp, according to securities filings released Tuesday.

Both companies are up 16 percent or more since President Donald Trump's surprising November election victory, compared with a 9.6 percent gain in the broad Standard & Poor's 500.

Jana Partners, one of the largest U.S. activist investors, added six new healthcare companies to its portfolio, and increased its stake in 11 other companies in the sector by 50 percent or more, including biotechnology holdings such as Nuvasive Inc and Acadia Pharmaceuticals Inc. Shares of Acadia are up 72 percent since Election Day, while shares of Nuvasive are up 24 percent.

Appaloosa Asset Management, run by billionaire David Tepper, nearly tripled its stake in pharmaceutical company Allergan PLC, to 15.8 percent of its portfolio, according to filings. Shares of the company are up 24.6 percent since the Nov. 8 election.

The winning bets come as equity hedge funds gained 2.1 percent in January, the strongest start to a calendar year for the industry since 2013, according to Hedge Fund Research. Total assets under management in the hedge fund industry reached $3.02 trillion at the end of the fourth quarter, the first time that hedge fund assets surpassed $3 trillion, the research firm said.

Trump's administration is expected to slash financial regulation, helping push the financial companies in the S&P 500 up 22.3 percent since Election Day. Pharmaceutical companies, meanwhile, have rallied on Trump's pledge to speed drug approvals.

The quarterly disclosures of manager stock holdings, in what are known as 13F filings with the U.S. Securities and Exchange Commision, are closely watched as investors look to divine what well-known hedge fund managers are buying and selling. However, the filings are backward looking and come out 45 days after the end of each quarter, meaning that funds could have added to or sold their positions since.

While the position information from the filings does not reflect January activity, fund managers have said they continued to play the same trends.

But not every hedge fund manager made savvy bets in the fourth quarter.

Tiger Global, known in part for taking concentrated positions in companies, sold all of its shares in Apple Inc during the fourth quarter, a position that made up 5.8 percent of its portfolio the quarter before. Shares of the iPhone maker hit a record high Tuesday and are up 16.5 percent since the start of the year.

Warren Buffet's Berkshire Hathaway, meanwhile, more than tripled its position in the company over the same time, to 4.5 percent of its portfolio.
Haha! Love that last comment, the Oracle of Omaha teaching these young hedge fund swingers how real money is made (Buffett was very busy buying $12 billion of stock from the election to the end of January).

It's that time of the year again where we all get to peek into the portfolios of "money manager gods" and some not so divine hedge fund and asset managers. Before reading this comment, make sure you skim through my last comment going over top funds' activity in Q3 2016.

I will let you read some more articles on 13F filings like these ones:

Icahn raises stakes in Herbalife, Hertz; cuts PayPal, Freeport-McMoran
Soros Fund Management buys new stakes in financials
Soros gets out of gold, Paulson cuts SPDR Gold shares
Buffett's Berkshire takes huge bite of Apple shares, boosts airline stakes

You can also read all the Google articles covering 13F filings to see what those smart "billionaires" bought and sold last quarter.

For me, it's a total waste of time as markets have moved a lot following the elections. Also interesting to note the leaders of last year are lagging early this year so there is a reversal going on.

I do go over top funds' holdings for ideas (where did they add and why?) but I always look at the daily and weekly charts to determine whether or not to initiate a position.

More importantly, I am consumed by big macro trends, that's what drives my personal trading and why I'm very careful interpreting what the tops funds bought and sold last quarter.

In my last comment covering a CFA Montreal lunch featuring André Bourbonnais, the President and CEO of PSP Investments, I was very adamant about something:
[...] given my views on the reflation chimera and US dollar crisis, I would be actively shorting emerging markets (EEM), Chinese (FXI), Industrials (XLI), Metal & Mining (XME), Energy (XLE)  and Financial (XLF) shares on any strength here (book your profits while you still can). The only sector I like and trade now, and it's very volatile, is biotech (XBI) and technology (XLK) is doing well, for now. If you want to sleep well, buy US long bonds (TLT) and thank me later this year. 
I couldn't care less what Buffett, Soros, Tepper, Dalio, or Jim Simons and other super quant hedge managers are buying and selling, I always take a step back and THINK before initiating any position and I ask myself very tough questions on global inflation versus global deflation.

I realize markets can move in the opposite direction of my long-term deflationary call, but that's alright, it gives me opportunities to trade some sectors like biotech (XBI) and technology (XLK) knowing full well "markets can stay irrational longer than you can stay solvent."

I listen carefully to the views of smart strategists like François Trahan of Cornerstone Macro who was in town a couple of weeks ago for another CFA Montreal luncheon I covered on my blog where he expressed his bearish views but I've been more bullish than he him in the short-run knowing how all the quants and CTAs will try to squeeze as much juice as they can from the Trump rally.

If you ask me, the biggest risk now in stocks is a market melt-up akin to the folly of 1999-2000 when you would wake up every day to see tech stocks like Microstrategy (MSTR) up 10, 20 or 30% a day. Do you remember those crazy times? I certainly do, it was nuts.

Admittedly, for a lot of structural reasons (global deflation being the biggest one), the chances of another tech bubble are low (even if I'd love to see a biotech bubble), but never say never and remember, despite all the talk of upcoming Fed rate hikes, there is plenty of juice in the financial system to drive risks assets even higher (and this despite the recent tightening of financial conditions).

Most big hedge funds are more worried about Trump's slew of uncertainties and how to navigate these dizzy presidential tweet filled days.

Hedge fund quants engaged in high-frequency, momentum trading love these type of markets because they can squeeze shorts out of their positions and enjoy the ride up.

But data nerds are struggling to gain power at some hedge funds and I'm not sure all these whiz kids are worth the huge investment. I read nonsense from the Wall Street Journal about how Julian Robertson's Tiger Cubs have become Wall Street prey to all these quant funds and how they're investing in quants and risk managers after suffering a terrible year last year.

This is a total waste of time, money and effort. Look at Buffett, he keeps it simple and clean and is killing all these hedge funds and quant funds over the long run.

Last year was a tough year for a lot of marquee hedge funds like Andreas Halvorsen's Viking Global, one of my favorite long-short hedge funds. After posting a 4% loss in 2016, its worst performance since launching back in 1999, Halvorsen outlined important changes to his fund's managerial structure, tightened up risk management and expanded the universe of stocks they cover (read more here).

I met Andreas Halvorsen back in 2002 when he was part of my directional hedge fund portfolio at the Caisse. He is extremely impressive and very competent at what he does. I wouldn't think twice about investing in his fund even after a "disappointing" year (Viking is already doing much better this year).

Another big shot hedge fund star who suffered "relatively" disappointing returns last year is Steve Cohen, the perfect hedge fund predator waiting to get back in the game next year when he'll be back at it again under the new improved SAC Capital.

[Note: Read this comment from an ex-SAC trader to get an inside look at how he used to run his shop. There is a lot of nonsense being written on Cohen.]

Cohen's (family office) firm Point72 Asset Management returned just 1% last year, according to Bloomberg, underperforming both the S&P 500, up 9.5% in 2016, as well as hedge funds in general, which averaged returns of about 5.6% for the year. It was Cohen's worst year on record other than 2008, when he lost nearly 28%—the only year the billionaire trader has lost money, though he did outperform the broader market.

Love him or hate him, however, Cohen is fiercely competitive and he's upfront about what went wrong last year:
[...] in an exclusive interview with Fortune in the fall, Cohen reiterated his desire to not only beat the market, but to be the best among money managers—despite the fact that he doesn't currently compete for business in that industry. "There may be firms out there that are happy being middle-of-the-pack and having modest returns, and maybe don’t work as hard as other people and are perfectly acceptable. That’s not me," he said. "If I’m going to be mediocre—if I’m going to be mediocre, I’m going to question whether I should stay in this business."

Indeed, if Cohen wants to begin managing outside money again starting next year — and the consensus in the industry is that he does — investors will want to look closely at how Cohen performed managing his own money these last few years, during which he has implemented strict new compliance procedures and been under the additional close watch of a government-mandated monitor stationed in his own offices. After all, it's Cohen's legacy of best-in-class returns that will lure investors back despite the stigma of the insider trading scandal, provided he can still deliver them.

That's going to be harder, though, if the market continues to behave the way Cohen expects. "The reality is growth is slow, valuations are high—that’s sort of a mix where it's going to be hard to see great returns going forward," he told Fortune during the interview. "If there’s a crash or significant correction, then you have an opportunity again because valuations are more reasonable. But right now, at this point, given the way the world looks, I would say returns are going to be pretty meager for the next couple years."

And Cohen is clearly feeling the pressure. In October, he announced a new bonus structure for his traders, upping the potential payout to 25% of their profits (from 20% previously) but only if they outperform certain benchmarks chosen by the firm. Meanwhile, traders who underperform will receive a lower proportion than they used to.

The additional incentive is designed to attract new talent to Point72, which has recently stepped up its recruiting efforts as Cohen himself focuses more on training and mentoring and less on trading stocks himself. After long managing the "big book" — the largest portfolio at his firm — Cohen has lately pared back his personal allocation. His trades still account for as much as 5% of Point72's profits, but that's down from 15% some 10 years ago.

Early last year, Cohen blamed a specific phenomenon for a patch of poor performance: Hedge fund crowding —or too many other hedge fund managers piling into the stocks he owned. When those other funds sold out en masse, Cohen said his "worst fears were realized" as he became "collateral damage," losing 8% in just four days in February 2016.

Cohen managed to recover during the remainder of the year, but only just enough to stay in positive territory.
Ah, the "old hedge fund crowding" excuse except in this instance, Cohen is right, there is a lot of crowding and let me explain why. All these pension funds keep listening their lousy consultants so everyone is investing in the same hedge funds and private equity funds.

The top hedge funds get fed the same trades from their investment bankers which cover them closely and they also talk to each other, so they feed each other a lot of trades and have the same quantitative and analytical approach to their portfolios. In short, there is a lot of group think in the hedge fund industry, much more than there ever was so it's hardly surprising to see lackluster returns among marquee funds.

Still, Cohen knows all this, he is a trader, one of the best traders ever, and if you look at Point72's top holdings as of the end of last quarter you'll understand why (click on image):

Notice how Cohen's family office increased its stake in Tesoro Petroleum Corp. (TSO) right before the stock took off? Point72 also significantly increased its stake in NVDIA Corp. (NVDA), the best performing tech stock last year: (click on image):

In an earlier version of this comment, I made the mistake of thinking Cohen's fund significantly increased its stake in Tesaro (TSRO) which also took off since last quarter (click on image)

Tesaro, not to be confused with Tesoro, is a biotech focusing on cancer treatments and it's part of the top ten holdings of the SPDR S&P Biotech ETF (XBI). It also could fetch north of $200 per share in a rumored takeover, Credit Suisse and Leerink analysts suggested last week.

The top institutional holders of Tesaro are well-known huge funds like Fidelity, Wellington, T. Rowe Price, Vanguard and BlackRock, but you also have some less well-known biotech funds too like BB Biotech and Perceptive Advisors.

Recall last quarter, right before the elections, I wrote about America's Brexit or biotech moment, urging my readers to buy the the SPDR S&P Biotech ETF (XBI) so I'm not surprised to see this company taking off the way it did.

Having said this, even though Cohen invested in Tesoro, not Tesaro, he still made great stock trades last year and I'm convinced he's going to come back strong this year and so will George Soros who lost close to a billion dollars after Trump won, loading up on big bets against the stock market at the wrong time (he will load up on big short positions at the right time this year).

Would you like me to go over all the top trades I saw and more importantly, where I see big money in the stock market going forward?

Well, that is a lot of work and I'm busy trading Leo's biotech watch list (click on each of three images):

And unlike these hedge fund and private equity "gods", I can't charge dumb pensions 2 & 20 for my comments or shaft you with other fees. In fact, if I'm brutally honest with myself, I'm the biggest dummy in the world offering you all this information for free!

Hope you enjoyed reading this comment, please remember to show your financial support by donating or subscribing to my blog on the top right-hand side under my picture. I thank those of you who value and appreciate the work that goes into these comments.

You can read many articles on 13F filings on Barron's, Reuters, Bloomberg, CNBC, Forbes and other sites like Insider Monkey, Holdings Channel, and whale wisdom. Interestingly, Insider Monkey now compiles a list of top 100 hedge funds based on tracking their long positions on each quarterly 13-F filing. This list can be found here.

My favorite service for tracking top funds is Symmetric run by Sam Abbas and David Moon but there are other services offered by market folly and you can track tweets from Hedgemind and subscribe to their services too. I also like Dataroma which offers a lot of excellent and updated information on top funds and a lot more on insider activity and crowded trades (for free).

In addition to this, 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.

Enjoy going through the holdings of top funds below but be careful, it's a dynamic market where things constantly change and even the best of the best managers find it tough making money in these schizoid markets.

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 in bond and currency markets but the top macro funds are able to invest across all asset classes, including equities.

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)

Top Market Neutral, Quant and CTA Hedge Funds

These funds use sophisticated mathematical algorithms to initiate their positions. 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

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

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) Melvin Capital Partners

55) Owl Creek Asset Management

56) Portolan Capital Management

57) Proxima Capital Management

58) Tiger Global Management

59) Tourbillon Capital Partners

60) Impala Asset Management

61) Valinor Management

62) Viking Global Investors

63) Marshall Wace

64) Suvretta Capital Management

65) York Capital Management

66) 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

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

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

Canadian Asset Managers

Here are a few Canadian funds I track closely:

1) Letko, Brosseau and Associates

2) Fiera Capital Corporation

3) West Face Capital

4) Hexavest

5) 1832 Asset Management

6) Jarislowsky, Fraser

7) Connor, Clark & Lunn Investment Management

8) TD Asset Management

9) CIBC Asset Management

10) Beutel, Goodman & Co

11) Greystone Managed Investments

12) Mackenzie Financial Corporation

13) Great West Life Assurance Co

14) Guardian Capital

15) Scotia Capital

16) AGF Investments

17) Montrusco Bolton

18) Venator Capital Management

Pension Funds, Endowment Funds, and Sovereign Wealth Funds

Last but not least, I track activity of some pension funds, endowment funds 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, CNBC's Leslie Picker takes a closer look at hedge fund gains under President Trump, saying they are gaining traction.

I agree with the guy at the end who said the "gig is up for hedge funds" (not top funds) but they then said something about "passive investing is here to stay" not realizing how the big alpha bubble migrated into a giant beta bubble which will implode, leaving many wondering why.

Thursday, February 16, 2017

Lunch With PSP's André Bourbonnais?

The President and CEO of PSP Investments, André Bourbonnais, was the invited guest at a CFA Montreal luncheon on Wednesday. He was interviewed by Miville Tremblay, Director and Senior Representative at the Bank of Canada in what proved to be a very engaging and fruitful discussion (click on image):

Before I give you my comments below -- and you should definitely read them to gain extra insights that I got after the luncheon was over -- let me first thank Mrs. Lynne Rouleau (hope I spelled her name right, she is super nice),  André Bourbonnais's executive assistant who put me in touch with the people at the CFA Montreal to cover this luncheon.

I also want to thank Roxane Gélinas and Véronique Givois at CFA Montreal for finding me a spot in the corner to listen in and for sending me nice pictures like the one at the top of the comment and this one below (click on image):

Here you see Carl Robert of Intact Investments who is Vice-President of CFA Montreal, Miville Tremblay of the Bank of Canada, Sophie Palmer of Jarislowsky Fraser and President of CFA Montreal, and of course, André Bourbonnais, President and CEO of PSP, the guest of honor (you can see the governance of CFA Montreal here).

I am glad I attended this event as it was snowing hard Wednesday morning and I was afraid I'd have to cancel. But the snow storm stopped, told the cab driver to take the Decarie expressway which was miraculously empty (love it when that happens) and I got to the St-James Club right on time.

I happen to love this venue and sat next to a couple of nice journalists who also attended the luncheon. One of them, Pierre-Luc Trudel of, already wrote a nice short article (in French) on the luncheon, Cap sur le marché privé:
Avec des perspectives de rendements relativement modestes dans l’ensemble des catégories d’actif au cours des prochaines années, Investissements PSP cherche à diminuer son exposition aux marchés publics pour générer de la valeur.

À long terme, l’objectif du quatrième plus grand investisseur institutionnel canadien est d’investir 50 % de son actif dans les marchés publics et 50 % dans les marchés privés, ce qui comprend notamment l’immobilier, les infrastructures, la dette privée et le placement privé.

« Nous étions relativement en retard par rapport à d’autres grandes caisses de retraite canadiennes dans certaines catégories d’actifs, principalement les infrastructures et les dettes privées », a expliqué mercredi le président et chef de la direction d’Investissements PSP, André Bourbonnais, devant les membres de CFA Montréal.

Pour « rattraper son retard », Investissements PSP a par exemple décidé de miser sur la dette privée en ouvrant en 2015 un bureau dédié à cette catégorie d’actif à New York. « Le talent et le réseau dans la dette privée est vraiment à New York », a-t-il affirmé.

Des occasions intéressantes se trouvent aussi du côté des infrastructures, mais M. Bourbonnais émet tout de même une mise en garde. « Les investisseurs ont tendance à les substituer aux obligations, mais ils sous-estiment souvent les risques associés à cette catégorie d’actif. »

Il privilégie également les investissements dans les projets d’infrastructures déjà opérationnelles par rapport à ceux encore au stade de développement. « Les caisses de retraite sont de bons propriétaires, mais peut-être pas de bons développeurs », a-t-il dit, tout en admettant que les primes pour les projets en développement sont beaucoup plus intéressantes.

La fin de l’environnement de bas taux?

Déréglementation, baisses d’impôt et investissement dans les infrastructures publiques, voilà des éléments de la politique de Donald Trump qui, s’ils sont réalisés, engendreront une poussée inflationniste aux États-Unis, qui à son tour favorisera une hausse des taux d’intérêt.

C’est pour cette raison qu’André Bourbonnais explique favoriser des portefeuilles de titres à revenu fixe flexibles à durée « relativement courte » où les obligations de sociétés sont surpondérées par rapport aux obligations gouvernementales. « Mais dans une perspective historique, même avec une hausse des taux de 100 points de base, on demeurerait dans un environnement de taux bas », a-t-il relativisé.

Du côté des actions, on anticipe des rendements d’environ 6 ou 7 % sur un horizon de 10 ans. Dans ce contexte, la gestion active permettra-elle d’aller chercher de la valeur ajoutée? « Nous faisons de la gestion active à l’interne pour aller capter de la valeur là où il y a de l’inefficience, dans les marchés émergents et les petites capitalisations, par exemple », a expliqué M. Bourbonnais.

Mais dans les marchés où l’offre est plus grande, comme les actions canadiennes, Investissements PSP privilégie les mandats de gestion externes ou encore la gestion passive. L’investisseur prévoit d’ailleurs réduire sa répartition en actions canadiennes au cours des prochaines années, la faisant passer de 30 % à environ 10 à 15 % de son actif total.
The article above is in French but don't worry, I will translate the main points below. In fact, from where I was sitting in the corner, I couldn't see André Bourbonnais and Miville Tremblay, but it didn't matter as I was furiously jotting down notes in English as they spoke in French (thank goodness my parents pushed all three kids to study in French private high schools as my time at Le Collège Notre Dame was tough but very rewarding. My brother studied at Brébeuf where he had Justin Trudeau as a classmate and my sister studied at Villa Ste-Marceline. All three are great schools).

Anyway, Miville started things off by discussing the reflation trade, asking André Bourbonnais if he thinks low interest rates are here to stay. André (will avoid calling him Mr. Bourbonnais each and every time) said that if President Trump implements the good elements of his economic policy (deregulation, tax cuts, spending on infrastructure, etc.), rates will rise in the US and so will inflationary pressures. In this environment, the Fed doesn't want to fall behind the curve and will have to hike rates.

This is why in their bond portfolio, PSP is overweight corporate bonds and short-duration government bonds relative to long-duration government bonds [Note: Given my views on the reflation chimera, I wouldn't throw in the towel on long bonds and would pay close attention to top strategists like François Trahan of Cornerstone Macro who was in town for the last CFA Montreal luncheon. Make sure you watch Michael Kantrowitz's recent video clip on Risks Outlook: Away From The Current, Back To The Future.]

Now, to be fair, André Bourbonnais isn't an economist by training (he is a lawyer) and he openly stated that when he watches people like Ray Dalio or others stating conviction views on where the global economy is heading, he is impressed but he "wouldn't be able to sleep at night making high conviction calls based on anyone's macro views."

And, as you will see below, André has legitimate concerns on Europe and emerging markets, so he doesn't see rates rising back to historical levels and thinks we're in for a long slog ahead where rates will remain at historically low levels.

In fact, when asked about asset classes, he said "all assets classes will experience lower returns going forward." There is short-term momentum in stocks but when the music stops, watch out, it will be a tough environment for public and private markets. Still, despite the volatility, he thinks stocks can generate 6-7% over the long run.

Interestingly, André said that PSP and the Chief Actuary of Canada (Jean-Claude Ménard) are currently reviewing their long-term 4.1% real return target because it may be "too high". This has all sorts of political implications (ie. higher contribution rates for federal government and federal public sector employees) but he mentioned that the Chief Actuary is skeptical that this real return target can be achieved going forward (I totally agree; more on this in a future blog post).

When the discussion shifted to private markets, that's when it got very interesting because André Bourbonnais is an expert in private markets and he stated many excellent points:
  • Real estate is an important asset class to "protect against inflation and it generates solid cash flows" but "cap rates are at historic lows and valuations are very stretched." In this environment, PSP is selling some of their real estate assets (see below, my discussion with Neil Cunningham) but keeping their "trophy assets for the long run because if you sell those, it's highly unlikely you will be able to buy them back."
  • Same thing in private equity, they are very disciplined, see more downside risks with private companies so they work closely with top private equity funds (partners) who know how to add operational value, not just financial engineering (leveraging a company us to then sell assets).
  • PSP is increasingly focused on private debt as an asset class, "playing catch-up" to other large Canadian pension funds (like CPPIB where he worked for ten years prior to coming to PSP). André said there will be "a lot of volatility in this space" but he thinks PSP is well positioned to capitalize on it going forward. He gave an example of a $1 billion deal with Apollo to buy home security company ADT last February, a deal that was spearheaded by David Scudellari, Senior Vice President, Principal Debt and Credit Investments at PSP Investments and a key manager based in New York City (see a previous comment of mine on PSP's global expansion). This deal has led to other deals and since then, they have deployed $3.5 billion in private debt already (very quick ramp-up).
  • PSP also recently seeded a European credit platform, David Allen‘s AlbaCore Capital, which is just ramping up now. I am glad Miville asked André about these "platforms" in private debt and other asset classes because it was confusing to me. Basically, hiring a bunch of people to travel the world to find deals is "operationally heavy" and not wise. With these platforms, they are not exactly seeding a hedge fund or private equity fund in the traditional sense, they own 100% of the assets in these platforms, negotiate better fees but pump a lot of money in them, allowing these external investment managers to focus 100% of their time on investment performance, not marketing (the more I think about, this is a very smart approach).
  • Still, in private equity, PSP invests with top funds and pays hefty fees ("2 and 20 is very costly so you need to choose your partners well"), however, they also do a lot of co-investments (where they pay no fees or marginal fees), lowering the overall fees they pay. André said "private equity is very labor intensive" which is why he's not comfortable with purely direct investments, owning 100% of a company (said "it's too many headaches") and prefers investing in top funds where they also co-invest alongside them on larger transactions to lower overall fees (I totally agree with this approach in private equity for all of Canada's mighty PE investors). But he said to do a lot of co-investments to lower overall fees, you need to hire the right people who monitor external PE funds and can analyze co-investment deals quickly to see if they are worth investing in (sometimes they're not). He gave the example of a $300 million investment with BC Partners which led to $700 million in co-investments, lowering the overall fees (that is fantastic and exactly the right approach).
  • In infrastructure, André said "they can deploy a lot of capital" and "direct investing is more straightforward" giving the example of a toll road where once it's operational, they know the cash flows and can gauge risks and don't need to invest through a fund. However, he also discussed a platform for PSP's airports where they need expertise to better manage these infrastructure investments. 
  • He said the risks in infrastructure are "grossly underestimated" and just like real estate, another long-term asset class, valuations are very stretched. "Too many investors see infrastructure as a substitute to bonds and underestimate the risks in these assets."
  • André praised Michael Sabia for venturing into greenfield infrastructure projects like the REM Montreal project but said that these projects are risky. Still, he added "their risk premium is compelling relative to brownfield projects which have gotten very pricey." He was happy to see Jim Leech was tapped to get things going on the federal infrastructure bank and they look forward to seeing if this bank can reduce the risk for pensions to invest in greenfield infrastructure projects in Canada (by the way, scratch Michael Sabia off the list to head this new infrastructure bank, his mandate was just renewed for another four years at the Caisse, most likely to allow him to see the completion of the REM project, his baby). He also said PSP is open to participating in US greenfield infrastructure projects if the terms and risk are right.
  • In venture capital, it's more difficult because "PSP cannot invest in scale to move the needle" but it's looking at setting up technology platforms to invest in trends like artificial intelligence (AI) and other emerging technologies like robotics (I love biotech, think there are great undervalued public and private biotech companies out there but you need to team up with top biotech and VC funds to find them).
  • Over the long-term, PSP's asset mix will move to 50% in private markets (real estate, private equity, private debt and infrastructure) and 50% in public markets.
 In terms of hedge funds, André Bourbonnais had this to say:
  • PSP is different from CPPIB, one the largest global investors in hedge funds with close to $14 billion in hedge fund assets, because PSP's hedge fund portfolio is very concentrated and funded via an overlay (portable alpha) strategy (just like Ontario Teachers', remember what Ron Mock said: "Beta is cheap, you can swap into any bond or stock index for a few basis points but real alpha is worth paying for").
  • He said that unlike the Caisse, PSP has no mandate to invest in the local economy and local emerging managers will be evaluated against all their managers all over the world. Their objective is clear: "To maximize returns without taking undue risk". This means it will be tougher for Quebec's emerging managers to emerge but if they are good, PSP will invest in them (I would recommend emerging managers look elsewhere for assets).
On public markets, André Bourbonnais mentioned a few things:
  • PSP doesn't engage in market timing. It invests in private and public markets over the long run. There are numerous geopolitical concerns (US, Russia, North Korea, Europe, Brexit, Middle East, etc.) and "fat tail risks" but these are constantly there so you need to take a long-term view.
  • Having said this, there are cycles and swings in all asset classes, but it's "hard to sell your real estate and infrastructure holdings ahead of a Brexit vote" (not that you'd want to), so for obvious reasons, when risks are high, there is more activity in public markets where liquidity is much better and it's easier to tinker with the asset mix.
  • Because of its size, $130 billion and growing fast, PSP has decided not to hedge currency risk going forward (like CPPIB, smart move) and even though liabilities are in Canadian dollars,  it is looking to reduce its exposure to Canadian equities from 30% to 15% (another smart move).
  • Interestingly, in emerging markets, André said "they're not overweight" and he "doesn't have a very clear view" even after spending a lot of time in China and India. He gave the example of all the hoopla surrounding Brazil years ago and look at where they are now. I agree and have always thought there was so much nonsense and exaggerated claims on the "BRICs" and even remember attending a Barclays conference in 2005 on commodities and BRICs where everyone was trying to sell me their glowing story. I came back and recommended to PSP's board that it not invest in commodities as an asset class for many reasons (that decision alone saved PSP billions in losses and had senior managers back then listened to my warnings on the credit crisis, they would have avoided billions more in losses!). Also, given my views on the reflation chimera and US dollar crisis, I would be actively shorting emerging markets (EEM), Chinese (FXI), Industrials (XLI), Metal & Mining (XME), Energy (XLE)  and Financial (XLF) shares on any strength here (book your profits while you still can). The only sector I like and trade now, and it's very volatile, is biotech (XBI) and technology (XLK) is doing well, for now. If you want to sleep well, buy US long bonds (TLT) and thank me later this year.
  • I believe André said the internal/ external mix for active managers for all assets is 75%/ 25% but please don't quote me on that as I am not sure (others told me they are not sure if it's the other way around but I heard it this way and unless I'm told it's a mistake, will keep it like this).
Finally, André Bourbonnais ended by stating PSP will improve its brand among Montreal's community at large and in particular, Montreal's financial community. This is a clear separation from his predecessor, Gordon Fyfe, who was a lot more low key in terms of communication and didn't see the need for him and his employees to speak at local conferences (although it happened on rare occasions).

I'm not blaming Gordon for this, that's his style, but I agree with André Bourbonnais that PSP can no longer stay under the radar, nor should it. It's a major Canadian pension fund growing by leaps and bounds and it needs to be more engaged with its local community and help shape and grow Montreal's financial industry as much as it can (as long as the alignment of interests are there) and just be more active and present in the local community.

I quite enjoyed this exchange between André Bourbonnais and Miville Tremblay. At the end of the luncheon, I went to introduce myself but he was swarmed by people so I couldn't shake his hand and properly introduce myself. Instead, I emailed him right after to tell him I enjoyed this exchange and hopefully we can meet on another occasion. He was nice and emailed me back saying he looked forward to reading my comment.

One person I did run into at the end of the luncheon and was glad to see was Neil Cunningham, PSP's Senior Vice President, Global Head of Real Estate Investments. Neil came to me and while I recognized him, he shed a lot of weight and looked great. He told me he's laying off the carbs and booze, exercising and sleeping more (he looked better than when I last saw him at PSP in 2006 and his wife is right, skinny ties are better and in style). 

Anyway, Neil and I chatted about the luncheon and he shared some interesting tidbits with me that you will only read here, so pay attention:
  • On rates going up in the US, he said that was only a partial answer because while the US is doing well, the rest of the world isn't firing on all cyclinders. He did say that Germany just posted a record trade surplus and it's in their interest to maintain the Eurozone intact, so he is cautiously optimistic on Europe.
  • On private equity fees, he agreed with André Bourbonnais, PSP doesn't have negotiating power with top PE funds because "let's say they raise a $14 billion fund and we take a $500 million slice and negotiate a 10 basis reduction on fees, that's not 10 basis points on $500 million, that's 10 basis points on $14 billion because everyone has a most favored nation (MFN) clause, so top private equity funds don't negotiate lower fees with any pension or sovereign wealth fund. They can just go to the next fund on their list."
  • He said that 20 partners account for over 80% of PSP's real estate portfolio and he spends a lot of time visiting them to figure out any changes in their strategy and execution. "You know the drill Leo, they throw a pitch book in front of you but I toss it aside and request a a meeting with the CEO and senior partners to dig deeper in their strategy." I know exactly what he means which is why I always requested to meet with senior people at the hedge funds I invested with and grilled them so hard, at the end of the meeting, they either loved me or hated me but I wasn't there to schmooze and have fun (only after I grilled them and they still wanted to see my face did I go grab a beer or dinner with them). Neil said he spends a lot of time traveling for face to face meetings which are far better than any other way of communicating (agreed).
  • Interestingly, he told me that real estate will do fine in a rising rate environment "as long as it is accompanied with higher inflation". No inflation or deflation is bad for real estate assets.
  • He said he is always selling assets every year because sometimes the platforms they use get too big, so they decide to shed assets to large funds -- like CPPIB which bought half of PSP's New Zealand real estate portfolio -- and to smaller pensions when it's a smaller transaction.
  • I told Neil he should get in touch with David Rogers at Caledon Capital Management who helps small to mid size pensions invest in private equity and infrastructure because I'm sure they will get along and might be able to help each other. Then I told him I should be helping Caledon on these deals and get paid for it! -:)
  • But Neil isn't selling "trophy assets" like 1250 René-Lévesque West in Montreal which he rightly considers the best office building in the city with an important long-term tenant (PSP).
  • I told him along with Daniel Garant, PSP's Executive Vice President and Chief Investment Officer, he's one of the only surviving senior managers from the Gordon Fyfe era, everyone else is gone. He told me: "that's true but Daniel and I just focus on delivering performance and that's why we're still around." I then asked him how long he'll be doing this, to which he responded "as long as I'm still having fun."
Neil is a great guy, I've been critical of PSP's silly real estate benchmark which his predecessor implemented (with the full backing of André's predecessor and PSP's board back then) but there's no denying he's one of the best institutional real estate investors in the world (and woud outperform even with a tougher RE benchmark).

On that note, let me thank Neil, André Bourbonnais, Miville Tremblay (did a great job) and the rest of the CFA Montreal members who did an outstanding job organizing this luncheon (everything was perfect).

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Below, once again, take the time to watch this clip of André Bourbonnais discussing long term perspective from a Deloitte Director's Series event that took place last year. Listen carefully to what he says, he knows his stuff even if he sometimes forgets he's now working at PSP, not CPPIB (it's alright, they're very similar).