Seth Klarman’s Baupost to Return Some Capital to Clients

September 11, 2013   Stephen Taub

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The Boston-based asset manager says the firm’s capital base is too large for the number of opportunities it sees for investment.

Seth Klarman’s Baupost Group has decided to return some money to investors at year-end, but it has not yet determined the amount, according to a person familiar with the firm’s plans.

This would be only the second time Baupost returned money to investors in the Boston-based investment firm’s 31-year history. The previous time was in 2010, and Baupost subsequently raised money in early 2011.

Earlier this year we reported that Baupost told clients it would probably return some capital to investors at year-end unless investment opportunities dramatically increased by later in the year. However, those opportunities have not materialized.

In a letter dated April 29, Klarman said the goal is "to better match our assets under management with the opportunity set we see for new investments." The decision was made, in part, after a series of discussions with clients on the firm’s quarterly webcasts with investors. The firm’s goal is to keep assets under management at $25 billion, according to the person familiar with Baupost.

At the end of 2012, Baupost had $26.7 billion under management, making it the seventh-largest hedge fund firm in the world, according to the most recent annual Institutional Investor’s Alpha ranking of the world’s 100 largest hedge fund firms.

Baupost’s returns this year across its many partnerships range roughly between 7.75 percent and 8.50 percent through July net of fees, the latest figures available. The firm is known for holding a fair amount of private investments that take longer to value each month than publicly traded securities. Its annualized return since inception is in the high teens.

Baupost’s performance is even more impressive given its penchant for holding large amounts of cash. It has averaged 33 percent of assets in cash, and its cash balance can reach as high as 50 percent. It is now in the mid-30 percent range, up slightly from 32 percent at year-end.

In the first-quarter letter, Klarman points out that in early April cash balances rose by 2 percent after the firm received a substantial distribution from its position in Lehman Brothers Holdings debt, the first of several distributions it was expecting this year from Lehman investments.

Baupost is known as a deep-value investor. However, it is actually an eclectic investor that seeks undervalued, ignored assets — or those that are very complex — mostly among distressed debt, commercial real estate, mortgages and equities.

However, the firm does not use leverage to try to boost returns. Klarman, who is not afraid to run a concentrated portfolio, is willing to accept short-term underperformance to gain long-term performance that he believes exceeds that of his peers and with less risk. Klarman stresses that patience and discipline eventually can make you look prudent and prescient.

"Our willingness to invest amidst falling markets is the best way we know to build positions at great prices, but this strategy, too, can cause short-term underperformance," Klarman explained in an investor letter earlier this year.

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