Seth Klarman’s Baupost to Return $4 Billion to Investors

December 03, 2013   Stephen Taub

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The Boston hedge fund firm is returning capital for only the second time in its history owing to a lack of investment opportunities.

   Baupost Group founder Seth Klarman. Photo: (Bloomberg

Seth Klarman’s Boston-based Baupost Group plans to return about $4 billion at the end of the year, according to sources with knowledge of the firm's plans, Alpha can exclusively reveal.

We reported in September that Baupost had decided to give money back to investors at year-end, but the firm had not yet determined the amount at that time. Earlier this year we reported that Baupost told clients in a quarterly letter 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.

When Baupost completes the capital distribution, firmwide assets will likely be more than $25 billion, according to a source. Earlier this year we reported the firm’s goal is to keep assets at $25 billion.

This is only the second time in the hedge fund firm’s 31-year history that it is returning money to investors. The previous time was in 2010, and Baupost subsequently raised money in early 2011.

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

Baupost’s many partnerships were up 13 percent, on average, through the September quarter. 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.

The firm, which Harvard Business School alumnus Klarman helped to found, is often misdefined as a value investor. 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.

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