Seth Klarman’s Baupost Group was not able to translate the enthusiasm of equity markets into similar returns but the fund did well in Q1, according to Klarman’s latest letter to investors. As is the custom with Baupost, detail of returns and investments are released some time later.
Just like last quarter, Baupost continues to benefit from the liquidation of Lehman Brothers Holdings Inc. (OTCMKTS:LEHMQ) debt. This time the fund boosted its cash balance by 2 percent of AUM through Lehman. Baupost is looking forward to more inflows from US and international Lehman debtors throughout the year. The hedge fund also plans to return some capital to clients at the end of this year.
Klarman again talks about overdrive in stocks that has lulled investors into a new comfort zone where the Fed’s monetray easing is taken for granted. He takes a jab at Ben Bernanke again in his missive, saying that Bernanke will not take advice from the hedge funds and traders when he decides to take a u-turn on QE, and these investors will not have a sufficient door to exit from as inflation booms.
Klarman has been against the trend of jumping on QE bandwagon and reiterates that there is a false sense of calm in the US which is betrayed by the slowdown in almost every other part of the world. He adds that the US public is not, however, duped by promises of growth and wealth from raising debt load, adding taxes and increasing spending cuts. While painting a realistic picture, Klarman convincingly writes, “They know that society’s wealth is not unlimited, and that if the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse.”
Seth Klarman stresses that the greatest strength of Baupost is in making long-term investments that could lose for considerable periods but the fund has the confidence to stick to them with unwavering patience. The firm also applies a risk-averse strategy with lower leverage than other firms. Baupost believes in having a sizeable cash balance at hand when there are not many investing opportunities and is not deterred by under-performance, Klarman agrees that Baupost’s approach may seem over-cautious and conservative but it pays off in the long run. Baupost tries to keeps its portfolio concentrated in winning approaches and is not over excited about diversification.
Seth Klarman extended his condolences to the families who were disrupted as a result of attack on Boston marathon.