You might not know his name. But when he speaks or writes a letter (in this case) it is worth paying attention to.
Seth Klarman runs one of the largest hedge funds in the world ($27bn AUM) called Baupost Group.
His track record in managing and making money is impressive.
Founded in 1982, Baupost Group has had only two years of negative performance. This has made Klarman a billionaire. His investing style is contrarian and he is a deep value investor. He recently wrote an investor letter for his clients updating them on his views.
So what does Klarman think of the current equity market?
He is very worried. Klarman sees artificially high prices due to the Fed policy of near zero interest rates. He sees growing risk and inadequate potential investment return. In his annual letter to shareholders he wrote, ‘ A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality and yields’. While he does not know when a correction is coming in the markets he thinks investors are being complacent. In a letter to clients he states ‘When markets reverse, everything investors thought they knew will be turned upside down and inside out. Anyone who is poorly positioned and ill-prepared will find there is a long way to fall. Few if any will escape unhurt.’* Klarman’s view on the market is not surprising. He is a value investor who insists on a ‘margin of safety’ on every investment taken. Klarman is extremely risk averse and it is said is main goal is not stellar returns but preservation of capital.
Seth Klarman stands out in the hedge fund world not only for his exceptional returns. He is notoriously publicity shy (not really a hedge fund characteristic) and has rarely given an interview. His Baupost Group is also untypical of most hedge funds. He is known at times to have as much as 50-60% of assets in cash if he sees no opportunity. This is rare in the alternative investment universe where managers can earn large sums on the management fee alone. Instead of the typical 2 and 20, he charged 1 and 20 from the beginning, thereby clearly aligning his investors with his ability to perform.
Unfortunately investors cannot invest with Klarman. His fund has been closed to new money for years. But they can follow his advice. Or they can buy his book which is long out of print and has become an investment classic, ‘Margin of Safety’ on Amazon. But since it is out of print and Seth Klarman rarely gives interviews, the book is in extremely high demand. The current asking price for ‘Margin of Safety’? A cool $3750! No this is not an Aprils fools joke.
So what is the reason for this post on Klarman?
It is simply that I fully agree with the cautious approach taken by Klarman. The US market (S&P 500) has hit a new all time today. While there is a famous saying on Wall street that says ‘The trend is your friend’, we think there are very few investment opportunities especially in the US market. Emerging markets look much better, indeed we see value there, but then again the risks are higher. We continue to wait for a correction in the US markets which will yield better buying opportunities. In the meantime an investor who is under-exposed to Emerging markets would be well advised to start buying at current levels.
(Main photo credit Forbes Magazine, Billionaires list)
*Financial Times, March 1oth 2014 ‘Klarman warns of asset price bubble’ by Miles Johnson.
