Klarman Compares Treasuries Bunds and JGBs to Subprime and Greek Debt

Seth Klarman’s Baupost Group has returned 1.39% year to date, according to our sources with direct knowledge of the matter.  The fund had a better return for Q1, before experiencing a 1.2% decline in the second quarter. In terms of allocation, we have the first detailed insight into what assets the famous value hedge fund manager’s portfolio consists of:

Cash is 28%, compared to 25% in Q1, as we reported earlier. Klarman is waiting for opportunites to deploy the cash, and notes that having patience is crucial.

Distressed debt, which mostly consists of three companies liquidating is 23%.

Equity exposure has risen to 20%.

Real estate is 16%.

The remainder of assets is in hedges and structured products.

Seth Klarman notes the 2012 markets are like a roller coaster. As mentioned previously as well, Klarman is mostly avoiding European investments; 5% of the portfolio is in European debt, with another 5% in European stocks. Commercial Real Estate in Europe is another 2%. Altogether, 13% of Baupost’s portfolio consists of European assets.

Baupost continues to scour Europe for investments, and is becoming more familiar with each company. In 2011, Baupost opened an office in London. The fund thinks that many firms continue to hold onto troubled assets, which eventually will be sold for fire-sale prices. The hedge fund is waiting for the perfect moment when valuation gets cheaper to buy.

Klarman then goes on to note the macro picture:

Low interest rates are encouraging speculation. Congress promises to cut spending but does absolutely nothing. Klarman states that it would be funny if it weren’t so scary.

Klarman notes the absurditiy of investors flocking to supposedly safe sovereign bonds, such as US, Japanese, and German debt. He notes that investors once considered Greek sovereign debt and subprime loans safe as well.  It appears that equities are getting cheaper due to the flight to ‘safety’, over European macro concerns. High yield and many Government bonds have become ‘ridiculously expensive.’ One day, undervalued stocks will rise in value, while investors dump these safe haven bonds. Baupost is hedging all European investments, as it appears that he fears for the Euro. The fund still holds Lehman Debt, as noted earlier this year.

The macro concerns expressed by Seth Klarman do not seem to have changed much from what he stated earlier this year.

Bill Hellman, a Partner at Greylock Partners, is joining the Baupost Group’s Advisory Board.