After delivering investors “high single-digit gains for investors across all partnerships” in 2016, Seth Klarman and the employees at The Baupost Group, all devotees of a particular investment philosophy, might have reason to cheer. No, they did not “beat the market,” a challenging task to achieve on a consistent basis. What they did accomplish was coming close to the S&P 500’s near 11% gain in 2016 while reasonably hedged. Delivering performance after 34 years with three down years is a feat. That is particularly the case with risk hedges in place that reduce absolute returns. In fact, delivering performance with risk management overhead is a noncorrelated feat of the highest degree. While the $30 billion Baupost Group is commonly recognized as a tremendous value strategy shop, it is more. Klarman, in a letter to investors reviewed by ValueWalk, speaks like a noncorrelated fund manager at heart. He just isn’t generally recognized by this monkier.

Seth Klarman 2015 letter: Now’s Not The Time To Give Up On Value

2016 Hedge Fund Letters

Seth Klarman
By Hedge Funds [CC BY 3.0], via Wikimedia Commons

Wall Street does not like to admit its mistakes or engage in introspection, and this is a mistake

Wall Street is a place where highly confident and well-pedigreed expect to make a small fortune. But there is a problem, Klarman noted in his 2016 annual letter. “Unfortunately, overconfidence makes it hard for many to hold to the possibility that they might be wrong, with potentially painful consequences.”

There was always a significant positive beta involved in stock market investing. “You can’t go wrong if you go long” is a saying that, in part, acknowledges the importance of stock market beta rising all boats regardless of individual stock picking prowess.

While beta is involved to various degrees, Klarman’s value approach is decidedly not macro.

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