Baupost Group LLC is a $24 billion hedge fund run by famous value investor Seth Klarman. The hedge fund which likes to maintain tight secrecy, has come in the public eye over a lawsuit filed against Bank of America, and for their investment in a Mega-quarry in Ontario.
Sources familiar with the matter reported that the hedge fund was up for the first quarter of 2012, although it lagged the market.
Klarman does not think the recent market rally based on the Federal Reserve’s zero interest rate policies, and action by the European Central Bank to inject 1 trillion euros into the banking system.
Since late November through the end of March 31, the S&P500 was up 22% with almost no downturns.
Junk bonds are also showing signs of a return to risk, with over $75 billion of debt during the first quarter.
Klarman compares the current market rally with the one after Ben Bernanke announced QEII in the famous Jackson Hole speech, in August 2010. Klarman notes that the rally sparked by the speach ended in tears’, and that could happen with this rally.
Furthermore, the combination of leverage, low interest rates, and deficit spending, which led to the financial crisis are still existent.
Klarman notes that he does not look at the macro picture, but is especially worrying since the Government is actually encouraging speculation.
Cash balances were up from ~22% to 25%. Some of the cash came as debtholders of Lehman Brothers, like Baupost were paid out. However, Klarman noted despite the irrational exuberance there is value to be found.
The areas noted included distressed corporate debt, commercial real and estate several equities (such as Vivendi, which we reported recently). Several large websites stole our Vivendi exclusive without attribution, but copying is the ultimate flattery.
However, overall opportunities are limited. European investments are getting crowded which makes it harder to find bargains. Additionally, regardless of crowding now is not opportune time as there is more pain to come in the Euro-zone due to the flawed LTRO and overleverage. Klarman thinks an opportunity will come to buy distressed debt in Europe, but not right now.