Elliott International LP delivered 2 percent returns in the second quarter vs 5.2 percent for the S&P 500 total return index. Over a ten year period, Paul Singer’s hedge fund has generated over 253 percent compared to over 111 percent for the S&P 500, an investor letter reviewed by ValueWalk reveals. The $26 billion activist hedge fund investor weighed in on Argentina, addressed what was termed “the global monetary illusion” and highlighted bank risks that remain unaddressed by regulators, and were among many issues the 22-page quarterly report addressed.
See Elliott’s Q1 2014 letter here (This article is one of several regarding the Elliott investment letter ValueWalk will cover over the coming days, sign up for our free newsletter to catch all the coverage).
Elliott’s efforts to encourage Argentina to uphold its bond debts
Perhaps the most watched aspect in this newsletter might also be the least written about. Elliott Management has been credited as a leader in efforts to encourage the government of Argentina to uphold its bond debts, but on this topic Elliott held back on direct criticisms of the country as negotiations were approaching their final weeks before a potential default.
Under the title “Elliott in the News,” the hedge fund took aim at news coverage on the topic. While the New York Times provided praise for Elliott because “credit markets function better when the rule of law is upheld,” Foreign Affairs magazine call the hedge fund “dangerous fundamentalists” who were hell-bent on making it impossible for foreign sovereigns to restructure their debts, the report notes.
Elliott Management’s philosophy
Elliott notes the fund does not seek publicity. “While many journalists and commentators often badly misunderstand what Elliott is all about, we understand that this publicity is occasionally the cost of adhering to our philosophy…” The letter says that on multiple occasions it was described as seeking out litigation, a claim Elliott says is false.
“Litigation is uncertain, expensive, difficult and time-consuming. It is a last resort to which we only turn when a dispute becomes impossible to resolve through negotiations, as has been the case for many years with respect to Argentina due to the Argentine government’s refusal to negotiate with us,” the letter reads. “However, if we must litigate in the course of enforcing our contractual rights, then we will not shy away from it. And if publicity is also a part of that equation, then so be it.”
Paul Singer notes:
Elliott does not seek such publicity. Obviously, our lives would be easier if the press cared less about this particular position and/or similar positions that attract attention. The Economist ran a piece rebutting the silly and hyperbolic claim that our case will encourage lots of other investors to follow our lead, dryly noting that “There are easier ways to make money.” We think most other investors would certainly agree. As we have noted, one of the reasons that we continue to
see attractive opportunities, even in the current yield-hungry environment, is that complex, labor intensive situations are not everyone’s cup of tea.
Elliott Management: Derivatives exposure
Elliott has taken issue with the risks banks have on the books, in particular pointing out that the derivatives risk still remains opaque. “There is much more leverage in the financial system than meets the eye,” the letter says. Such banking risk includes “derivatives with notional amounts that total several hundred times the capital at these institutions.
Elliott didn’t mention it, but the derivatives exposure is so large it dwarfs the world economy, estimated over $70 trillion, not just bank capital requirements.
“Such instruments are generally reported off-balance sheet and individually range in riskiness, from exposures representing a small fraction of the notional amounts of the underlying reference assets, up to exposures that are the effective equivalent of 100% of notional amounts,” the letter says. “There is no additional capital available to support these derivatives.”
A major issue for Elliott and Paul Singer is proper disclosure – something still lacking even after the financial crisis.
“Despite a flurry of new accounting pronouncements post-crisis, there is still no meaningful disclosure about the risks and nature of these derivatives in the banks’ financial statements. Thus, there is no possible way for anyone (including bank executives and regulators) to understand whether banks are essentially leveraged (after an appropriate adjustment for derivative exposures that are the risk-equivalent of balance sheet assets and liabilities) 10x, 30x, 50x, or some other number.”
Elliott Management estimating big bank’s derivatives liabilities
When estimating the big bank’s derivatives liabilities, Elliott “guess” is the banks are leveraged between 30x and 60x. “This amount of leverage is dangerous and certainly not much of an improvement over the pre-crisis levels,” Elliott writes.
Backing this risk is the sovereign nations and their tax payers. “But the credit of governments (and their ability to tax their citizens) is not inexhaustible, and post-financial crisis, the credit of the major ‘safe haven’ countries is deteriorating at an alarming rate.”
A spokesperson for Elliott did not respond to a request to comment.