Currently, Seth Klarman is very popular in the value investment community. He is particularly popular on Gurufocus.com, where people are literally watching every move he makes. Like other money managers, we have no idea what he owns in his portfolio since he is not required to report that information. The best way to get information on his holdings is by looking at what Baupost Group, the hedge fund that he manages, holds. Like any other hedge fund, Baupost is forced to disclose their holdings quarterly in their 13-F. There is a time delay between the end of the quarter and the date of the release. For Q3 2009, Baupost released its 13-F on November 10th. This is a forty day delay. Additionally, Baupost does not have to reveal what prices it bought the holdings at, but only what positions it was holding on September 30th, 2009. If a security is purchased on July 1st, you will not know about that until November. By the time you are getting that information, it is extremely outdated. This is true for all hedge funds, mutual funds, and institutional investors with over 100 million assets under management. These institutions are all given up to 45 days from the end of the quarter to file their 13-F.

We can already see why it is hard to track accurately what institutional managers are doing, but Baupost Group is particularly hard to track. The reason for this is Klarman’s secretive nature. Klarman’s famous book Margin of Safety has been out of print for over a decade and is currently selling for $1,800 on amazon.com. It is one of the most stolen books from libraries and it costs several hundred dollars to get a used copy. People have speculated that the reason Klarman’s book is out of print is because he regrets revealing many of his investment secrets. This is not the only manner in which Klarman seems to be secretive. Even getting information about Baupost’s meetings can be quite difficult. Recently, notes were leaked about the Baupost meeting that took place in October 29th. They were immediately widely disseminated all over the Internet by hungry investors. However within a few days, these notes were removed from many websites and replace by a message, “removed by request of the author.” If you click on Baupost’s site, you will not receive any additional information. The site lists the Fund’s phone number, address, and a secured login for clients. If you are not a client, they will not provide any more information on the website. They are currently not accepting new clients.

Baupost group is one of the largest hedge funds in the world, yet it is so guarded. In fact, very few people have heard of it or Klarman, its founder. This is in contrast to some other large hedge fund managers such as John Paulson and George Soros (who are both widely known both inside and outside the investment community). For example, if you google their names, Soros has over two million hits and Paulson has one million hits. On the other hand, Klarman has less than eighty thousand hits.

One of the biggest mysteries about Klarman is what is he is actually holding in his portfolio. You can see his stock and convertible bond holdings and their value filed under the 13-F. In Baupost’s 13-F for Q3, total securities listed are $1.36 billion dollars. Klarman stated that he had 30% of his portfolio in cash which is not listed on the 13-F.

Now, here is the shocking part. I called up Baupost and they informed me that they had slightly under $20 billion assets under management. Let us assume that they are managing about $18 billion because that is slightly under the amount they named. That means $6 billion is in cash and $1.36 billion is in stocks and convertible bonds. That leaves 50% of their assets or about $10.6 billion not listed in their 13-F. On many websites, it is stated that Klarman’s largest holding is News Corp., which is 25% of his assets, yet this is only 25% of his stated stocks on the 13F. He has a $250 million stake in News corp. So while it is 25% of his stated assets, it is only a meager 1.3% of his total assets! It is not always so difficult to find out what hedge funds are invested in. For example, John Paulson has about $30 billion under management, and $20 billion of this is publically available on his 13F. This $1.36 billion is not an insignificant number, however it is clear that most of his return are coming not from the $6 billion in cash or even the $1.36 billion in stocks and convertibles. Most of his return is coming from his bond holdings. In fact, we would not even know that he had $6 billion had the notes not leaked out from the Baupost meeting. Without these details, all one would know is that Baupost had $1.3 billion in convertibles and stocks and about $17 billion unaccounted for.

One important thing to remember is when you see that Klarman has posted 20% returns annually, you might think you can achieve the same returns by coping him. However, this is not necessarily the case since most of his gains are coming from his bonds (which are not reported). This does not mean that Klarman is not an amazing stock investor or that his stock investments should be ignored. In fact, he has achieved some spectacular results from his stock portfolio, including a recent 75% return in one day from his holding in Facet Biotech Corporation. The significance of the above information is one must realize before trying to mimic Klarman is that you are only seeing a small fraction of the full picture. I doubt we will ever know what Klarman’s full holdings truly are.