Visualizing How Billionaire Investors Hedge Against Geopolitical Black Swans

Investors must always be comfortable with the idea that the market bears risk.

Sometimes this risk flies under the radar and isn’t as pronounced as it probably should be. However, as Visual Capitalists"s Jeff Desjardins notes, in other cases, the topic of risk can catapult to the forefront of discussion. There can be specific events or signals unfolding that give investors the jitters – and during these times, investors will make adjustments to their portfolios to avoid getting caught off guard.

HOW BILLIONAIRES ARE HEDGING

In the following infographic from Sprott Physical Bullion Trusts, we explain the particular geopolitical risks that have the world’s most elite investors concerned today – and what moves they are making to protect themselves from black swans.

Courtesy of: Visual Capitalist

The world isn’t predictable at the best of times – but after unanticipated occurrences such as Brexit and the election of Trump in 2016, the geopolitical tea leaves are getting even more difficult to read.

The world is approaching a major inflection point and the intense amount of global angst we’re experiencing now stems from deep, structural forces that have been building over decades.

– Reva Goujon, VP Global Analysis of Stratfor

According to Reva Goujon, VP Global Analysis of Stratfor, we are experiencing the perfect storm of “-isms”: nationalism, nativism, protectionism, and isolationism.

As a result, the following potential geopolitical risks are at the top of the agenda for experts and top investors:

Domestic risks:
Unpredictability of the Trump administration, government inaction, a trade war with China, and NAFTA renegotiations

 

International risks:
Economic nationalism, further “exits” from the EU, Russia and China seeking to assert authority, terrorism, escalation of Middle East conflicts, and North Korea’s nuclear ambitions

ELITE INVESTORS TAKING ACTION

With these risks perceived to be on the table, some of the world’s most elite investors like Ray Dalio and Warren Buffett are taking action. Here’s what they are up to:

Ray Dalio

Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates, had this to say:

When it comes to assessing political matters we are very humble.

-Ray Dalio, Aug 2017

Dalio’s advice: to stay liquid, stay diversified, and not be overly exposed to any particular economic outcomes. He also recommends a 5%-10% position in gold.

Warren Buffett

The Oracle of Omaha has a similar but very different perspective.

No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media.

– Warren Buffett, Feb 2017

With this in mind and with equities expensive, the seasoned value investor holds onto piles of cash to prepare for potential buying opportunities. Berkshire Hathaway now has $99.7 billion in undeployed cash, the most in the company’s history.

Bill Ackman

Billionaire hedge fund manager Bill Ackman took a position in “out of the money” call options on the VIX.

This will protect against stock market risk.

– Bill Ackman, Aug 2017

David Einhorn

The billionaire founder of Greenlight Capital says he is keeping gold as a top position.

The (Trump) administration comes with a high degree of uncertainty.

– David Einhorn, Feb 2017

Howard Marks

Lastly, the famous value investor Howard Marks warned his clients to move into lower-risk investments to protect against future losses.

The uncertainties are unusual in terms of number, scale and insolubility in areas including secular economic growth; the impact of central banks; interest rates and inflation; political dysfunction; geopolitical trouble spots; and the long-term impact of technology.

– Howard Marks, July 2017

 

Bill Ackman: "I’m Only Second To Donald Trump In Terms Of Clicks On The Internet"

There are several delightful tidbits in this weekend"s FT interview with ADP CEO Carlos Rodriguez, who has been engaged in a bitter proxy fight with activist investor Bill ackman. For those who are familiar with the Pershing Square head, it will come as no surprise that he has long harbored megalomaniac tendencies. For everyone else, the following segment should be quite eye-opening.

As ADP chief executive Carlos Rodriguez recalls it, activist investor Bill Ackman told him he should step down the first time he spoke to him. The second time, he warned him there would be a public fight. 

 

“He said: I know you don’t like the media, but I do and I’m really good at it,” Mr Rodriguez said. “And if this gets into a public battle, it’s going to be bad for you personally, it’s going to be bad for the company, but I’m fine with it because — and he said this — I’m told that I’m only second to Donald Trump in terms of number of clicks on the internet, and hence you will lose if there’s a public relations battle.”

It"s not clear what "clicks" Ackman was referring to: his official twitter account has 13.9K followers, and Ackman has tweeted a total of 9 times since joining Twitter this June. Perhaps Ackman has an inside look into google searches but we doubt that this is the smoking gun.

It gets better:

The fund manager also sought an extension of time from the board to nominate directors because he was going on holiday and needed more time to finish his presentation.  According to Mr Rodriguez, Mr Ackman told him: “I can’t change my vacation plans. And by the way, even if I wasn’t going on vacation, my presentation isn’t ready. I haven’t finished the work,” he recalled.

 

“And I’m like: Well, OK. I’ll relay that back to the board.”

 

“The board had a discussion. The board said: Why in the world . . . and everyone’s scratching their heads like: Why would we grant an extension?” Mr Rodriguez said. “He’s had plenty of time. He’s had a whole year.”

We can therefore commiserate with Rodriguez" summary of his Ackman interactions as "surreal"

Mr Rodriguez, who had never dealt with an activist campaign before Mr Ackman launched a proxy fight to win three seats on the board of the US HR and payroll processing company he runs, recounted in an interview the conversations that began in August this year, calling them “surreal”.

Perhaps the pressure finally got to bill - the stakes are certainly high: "Pershing Square has invested about 25 per cent of its funds in ADP, making the company its largest investment. The fund says that ADP can boost its profit margins by improving software and services, reducing operating costs and becoming more efficient."

In any case, as the FT adds, "Ackman disputes Mr Rodriguez’s recollection of their conversations, and has publicly said he is willing to work with the ADP chief executive. "It’s disappointing that ADP continues to attack the messenger instead of addressing the important questions we have raised about ADP’s operational underperformance and its deteriorating competitive position.""

As for attacking the messenger, there"s plenty to go around:

Mr Rodriguez is also critical of Mr Ackman’s record: after finishing 2016 down 9.6 per cent and 2015 down 16.2 per cent, his main fund is flat this year, though in 2014, he was up 36.9 per cent. In March this year, he apologised to investors over his disastrous investment in Valeant, which lost his funds about $4bn. 

 

“Unfortunately, what he has left is destruction and chaos in his wake on a number of other companies that did not work out,” Mr Rodriguez said.

Read the full interview here.

Whitney Tilson Shuts His Hedge Fund... Again

Back in the summer of 2012, we had some fun when we reported that Whitney Tilson - the consummate, if always late immitator of other prominent investors especially Warren Buffett and Bill Ackman - following several years of abysmal returns, closed his then-hedge fund T2 (with Glenn Tongue), splitting off into his own, oddly-named venture, Kase Capital. Well, Whitney - who in recent years was better known for his bizarre family photos from Africa than managing money- has done it again and according to the WSJ, Tilson closed his hedge fund... again, "the latest high-profile investor to close shop amid an extended period of disappointing returns for the industry."

As the WSJ adds, Tilson, 50, shared his decision with clients (apparently he still had some) on Sunday. His latest hedge fund, Kase Capital, which was managing a whopping 50 million at the time of closure, and down from a peak of $180 million, lost about 8% so far this year, a more than 20% underperformance relative to the S&P YTD gain of more than 13%.

As the WSJ adds sarcastically, "while he ran a relatively small fund, Mr. Tilson was a well-known hedge-fund manager thanks to television and conference appearances, as well as books and regular writing about investing and other topics." In other words, Tilson was not so much a "hedge fund manager" as its straight-to-CNBC marketer, and the results have confirmed it.

In an amusing twist, in 2016 Tilson - a staunch never-Trumpter - inexplicably found himself the subject of scathing criticism by Elizabeth Warren, after Tilson expressed modest public support of some of President Donald Trump’s cabinet and other appointments from the banking world, "even though Mr. Tilson is a lifelong Democrat who voted for Hillary Clinton."

“The next four years are going to be a bonanza for the Whitney Tilsons of the world,” the Massachusetts Democrat said at the time. She later apologized to Mr. Tilson for her criticism.

And so Tilson joins a long procession of managers, some of whom managed actual real money, who decided that it was impossible to navigate these centrally planned markets and an exit was the noble way to go.

He is hardly the last one: in the past several months, a couple of well-known hedge funds have closed. Among them, investor Eric Mindich closed his $7 billion hedge-fund firm, Eton Park Capital Management LP, billionaire Richard Perry shuttered his hedge-fund firm and Hugh Hendry exited his flagship fund in London. “I died in active combat,” Mr. Hendry told Bloomberg at the time. “The last three months were harrowing.”

Many more closures are coming as investors redeem cash ahead of year-end at a pace not seen since the financial crisis.

As for Whitney, who somehow managed money for more than 18 years, the WSJ says that he is "expected to manage his own money." Considering Tilson was one of the founding, and most vocal members of "Patriotic Millionaires" group begging to be taxed more, we assume he does, in fact, have money to manage (we are not so sure about his clients) and this wasn"t just yet another marketing gimmick from the now former hedge fund manager.

Whitney"s full farewell letter below:

Dear friends,

I recently decided to close my funds and return capital to investors (excerpts from my letter to them are below). It was a hard decision, but the right one.

Now, I am filled with enthusiasm about what I will do with the second half of my life. What might that be? I’m not sure, but I want to share a few thoughts – and would be grateful for your feedback and ideas.

I’ve been working full time for more than 30 years, almost all of that time in an entrepreneurial capacity. While my one “regular” job early in my career was a good experience, I like being independent and plan to remain so. My goal is to find opportunities that are personally interesting, give me the chance to collaborate with great people, and are sufficiently remunerative (contrary to Elizabeth Warren’s belief, I am most definitely not a billionaire!).

I expect that most of my work will continue to be in the investment field, as I still love it and am confident that I can put my energy and 18 years of experience to good use. While I no longer intend to manage others’ money, I’m exploring a number of ideas, such as:

1) Unearthing a few great investment opportunities each year, in which I can invest personally as well as share with a few others;
2) Serving on corporate boards;
3) Doing consulting in areas in which I have expertise such as capital allocation, strategy, and activist investing; and
4) Teaching and mentoring young value investors via writings, videos and seminars.

I would welcome your advice and suggestions, so please don’t hesitate to email me at WTilson@kasecapital.com or call me at (646) 258-0687.

Sincerely yours,

Whitney

Rats Fall From Ceiling At Dallas Chipotle In "Rare And Isolated Incident"

A day after Chipotle Mexican Grill faced an outbreak of norovirus at a Chipotle restaurant in Virginia, the company’s PR team is dealing with yet another embarrassing public-health incident. A Dallas TV station reported that, at one local Chipotle restaurant, customers’ lunch was ruined when several rodents reportedly fell from the ceiling and landed inside the dining area.

Footage of the incident - as one angry customer remarked - is enough to put one off from eating at the chain indefinitely:

Customers said the rats appeared to materialize from out of nowhere:

“If we would have been sitting at the table next to that it definitely would have fell on top of our food because it was literally right there,” Daniela Ornelas, of Dallas, told NBC DFW, adding that she and her boyfriend were eating during the lunch rush at the restaurant.

“I just kept wondering what it was, and I kept looking around until I looked at the floor, and I saw three rats, and I ran,” Ornelas said.

Chipotle shares plunged more than 6% on Tuesday after multiple customers reported getting sick after eating at a restaurant in Sterling, Virginia. Customers reported symptoms such as vomiting, diarrhea, severe stomach pain, dehydration, and nausea to the website iwaspoisoned.com, alerting Business Insider, which confirmed the norovirus outbreak with the company. At least 13 customers fell ill after eating at the Virginia Chipotle between July 14 and 15.

The outbreak echoed a public relations nightmare from two years ago, when reports of diners getting sick at Chipotle restaurants around the country first began to emerge. The company was found responsible for cases of salmonella, norovirus and e. coli, and saw its same-store sales decline precipitously. Chipotle’s shares shed nearly 50% of their value in the aftermath, a decline from which they have never recovered.

A Chipotle spokesperson issued a statement to NBC DFW Wednesday to explain how the rodents ended up in the dining room, adding that it was an “extremely isolated and rare.”

“We learned yesterday that mice got into a restaurant," the statement read, "and we immediately contacted professionals who identified a small structural gap in the building as the likely access point. We’re having it repaired. Additionally, we reached out to the customer to make things right. This is an extremely isolated and rare incident and certainly not anything we’d ever want our customers to encounter.”

Still, it looks like Chipotle is going to lose a few customers over this one.

"Ornelas said she was happy with how the employees handled the situation, but would likely not return to Chipotle"s West End location."

However, the outbreak hasn’t scared off devoted Chipotle customers like Bill Ackman. Ackman sent his first-ever tweet on Wednesday, featuring a photo of him smiling inside a Chipotle restaurant, with a caption that read “eating our own cooking @ChipotleTweets.” Ackman"s fund, Pershing Square Capital Group, owns 10% of Chipotle.

Eating our own cooking @ChipotleTweets and making my own mix at https://t.co/CiNtycYWhP pic.twitter.com/rYad7uKuI3

— Bill Ackman (@BillAckman1) July 19, 2017

Now, imagine what would happen to the stock price if Ackman got salmonella?
 

Bill Ackman Joins Twitter

After years of purportedly cultivating relationships with journalists to burnish his image in the press, Pershing Square Capital Founder Bill Ackman has created a twitter account, presumably to cut out the middleman and speak directly to the people, after eating a series of embarrassing losses from bad bets on Valeant pharmaceuticals and Herbalife Inc.

Ackman confirmed to Bloomberg that the account, which bears the handle @BillAckman1, is, in fact, genuine. Unfortunately, his reluctance to join the service – which was launched 10 years ago – at an earlier date left him unable to secure a handle using just his own name: That handle, apparently, belongs to an imposter.

Ackman forced to use @billackman1

— zerohedge (@zerohedge) June 29, 2017

Ackman’s fund ate a $3 billion loss in March when it announced it had liquidated its entire stake in Valeant Pharmaceuticals and has effectively resigned from the board, saying he won"t stand for re-election. In a statement, Ackman said "it was time to get out of the position, investment required disproportionately large amount of time and resources."

Ackman hasn’t yet tweeted, nor has he added profile picture.

Here’s a breakdown of the accounts Ackman is following, via BBG:

• Ackman was following 46 accounts on Thursday morning, including President Donald Trump’s @Potus and @realDonaldTrump accounts, and Lin-Manuel Miranda, the creator of the hit Broadway musical “Hamilton”


• Following Anthony Scaramucci, PIMCO, GS CEO Lloyd Blankfein


• Also following Larry Summers, Mohamed El-Erian, Ben Bernanke


• Follows French President Emmanuel Macron, ex-U.K. Prime Minister David Cameron


• Follows Jeff Bezos, Elon Musk, Tim Cook


• Also follows tennis stars Roger Federer and Frances Tiafoe

Which begs the question: Where’s our follow-back, Bill?
 

Ira Sohn Conference Summary Highlights And Investment Picks

While the hedge fund world finds itself in a time of crisis, with a "great rotation" of capital away from active management which continues to largely underperform the broader market, and toward cheaper, passive strategies, nothing could spoil the mood at one of the industry"s biggest events held today at the Lincoln Center, the 22nd annual Ira Sohn conference, where a dozen of the hedge fund industry"s most prominent names presented their best ideas.

Below is a summary of the hedge fund managers who spoke at the Sohn Conference in order of appearance, and the investment ideas they presented, courtesy of Reuters and Bloomberg.

Corvex’s Keith Meister:

• Bullish on CenturyLink; Reported 5.5% stake in 13-D today; Corvex’s largest position


• Said CenturyLink/Level 3 merger is gamechanging

Fine Capital’s Debra Fine:

• Recommends DHX Media; sees upside to C$20-C$30/share;

Pershing Square’s Bill Ackman:

• Reiterated his Howard Hughes Corp. long call


• Said South Street seaport is highly valuable citing tax efficiency and excellent locations.

Social Capital’s Chamath Palihapitiya:

• Bullish on Tesla 2022 convertible bonds


• Said there is "incredible opportunity" in the 2022 Tesla converts that the company could capture 5% of the global car market and be worth hundreds of billions of dollars

Algebris’s Davide Serra:

• Recommends shorting U.K. rates, warning of UK inflation and said that is one reason bonds are overvalued; also said Brexit will cost 7% of UK GDP over the next 8 years.


• Llikes UniCredit shares

Blue Harbour’s Cliff Robbins:

• Reiterates long Investors Bancorp which is undervalued relative to peers; sees upside to $19 due to significant growth in net income and franchise value; a potential M&A candidate

Greenlight’s David Einhorn:

• Bearish on Core Laboratories; Sees 45% downside to $65/share in "way overvalued" stocks


• Also said oil prices are unlikely to stage a V-shaped recovery, which will hit Core Lab"s business

DoubleLine’s Jeff Gundlach:

• Recommends pair trade of long EEM ETF, short S&P 500 ETF


• "When emerging markets outperform the S&P 500, active is outperforming the S&P 500"

Altimeter’s Brad Gerstner:

• Likes United Airlines Long; sees upside to as much as $235/share


• Millennials travel more than their parents; sees airlines as a secular growth story

Jericho’s Josh Resnick:

• Recommends Frontier Communications short; accused company of aggressive accounting practices; having a massive debt load and bad customer service

Glenview’s Larry Robbins:

• Likes DXC Technology: has good management, good acquisition of HPE by CSC, partnerships with innovative companies, tax reform could help


• Likes FMC: bought good assets from Dow and DuPont; transaction was advantaged to FMC. Also good lithium batter business that could be split off


• Likes Quintiles: significant strategies between Quintiles and IMS; Good for potential market share growth.

Sohn contest winner picked EBAY as long; sees ~45% upside

Next Wave Sohn picks below:

• Trafalgar’s David Copley Recommends Shorting Mirvac, JB Hi- Fi


• ThornTree’s Mark Moore Likes Liberty-Formula One


• Totem Point’s Neal Nathani Likes Xilinx


• Blockhouse’s Jack Franke Recommends Going Long MPLX


• Half Sky’s Li Ran Recommends Fevertree Drinks Long

Julian Robertson Yanks Money From One-Time Hedge Fund Whiz-Kid

2014 and early 2015 was a great time for Nehal Chopra, recently named an Institutional Investor Rising Star, the former Tiger Seed"s hedge fund Tiger Ratan Capital Management had received a $25 million investment in 2011 from investing legend Julian Robertson himself (subsequently the amount grew to $100 million) and after a series of impressive annual returns, including three straight blockbuster years, gaining 26.3% in 2012, 46.8% in 2013 and 22.3% in 2014, she was running a whopping $1.4 billion by June 2015.

The financial press would not stop fawning over Chopra.

Here is what Economic Times wrote about her in late 2014:

Nehal Chopra has been sprinting ahead of the pack most of her life. She became a top-ranked youth tennis player growing up in Mumbai, and received an MBA from Wharton while most of her peers were getting their bachelor"s degrees  Before she was 30, she persuaded billionaire Julian Robertson to seed her hedge fund firm Ratan Capital Management. Since 2009, Chopra has averaged 19 per cent annual gains by betting on companies in upheaval, almost triple the industry average. To her supporters, including Robertson, she"s a brilliant stock picker.

Chopra pitched Robertson after meeting him at charity events. The billionaire was impressed by her academic pedigree and tennis prowess. After growing up in Mumbai, where she attended Fort Convent and Sydenham College, Chopra graduated in 2002 from Wharton.

In short order, she made countless other financial outlets including both CNBC...

... and Bloomberg TV, where she appeared on Tom Keene"s show alongside Robertson himself.

That appearance, however, was her personal "top tick", because shortly thereafter, everything started going very wrong for Chopra, who as it later emerged was heavily invested in a handful of "hedge fund hotel" stocks, many of which were about to suffer spectacular losses.

After posting a 15.5% return in the first quarter of 2015, the fund collapsed - largely a function of the implosion of VRX - eventually producing a 19% loss for the year, a swing of more than 34% points in just nine months. As Institutional Investor reported, the fund continued to implode in the first half of 2016 when it suffered a 51.59% drawdown from May 2015 through June 2016.

As we previously reported and as II notes, like many of the Tiger Cubs and Seeds, Ratan runs a concentrated portfolio but Chopra always took it to a much greater extreme, with Ratan typically owning just seven to nine individual stocks.

Think Bill Ackman.  And just like Ackman, Ratan was mauled by its huge bets on drug companies Valeant and to a lesser extent, Allergan, which started to suffer big losses in the middle of 2015. They accounted for 35% of assets at the end of June 2015, just before the two stocks, especially Valeant, went into their tailspins. Valeant fell 75% in the first quarter of 2016 alone. At the end of Q2 2016 of last year, Ratan liquidated four positions, including Valeant and Allergan.

By the third quarter of 2016 Ratan liquidated four positions again, including two major holdings: Starz, the cable television network that was the firm’s third-largest position, and bottler Coca-Cola European Partners.

By the end of the fourth quarter Ratan was much more diversified, holding 20 individual stocks, a lot for the firm. All but six were new positions.

However, it was too little, too late for none other than her original sponsor, and as Institutional Investor reports, Julian Robertson told investors in the Q4 of last year that he was redeeming his money from Chopra"s Tiger Ratan Capital Master Fund.

Ratan confirmed this in a recent regulatory filing.

In 2016, Tiger Partners, LLC and Tiger Accelerator Seed Holdings, L.P. (“collectively, Tiger”) fully redeemed its investment in funds advised by Ratan and terminated its “seed” arrangement with Ratan. Ratan no longer shares revenues or any economics with Tiger.

Tiger Ratan has even dropped the “Tiger” name from its funds.

In its SEC filing, the firm reported having $375 million in regulatory capital, an inflated figure which includes leverage and notional values of derivatives. At the end of 2016, Ratan’s U.S. stock portfolio was valued at $165 million, up modestly from $135 million the previous quarter, and down over $1 billion from the $1.4 billion in AUM as of the summer of 2015.

The firm also disclosed in the filing that it currently has just four employees. It is not clear if it can afford any more employees with such a modest AUM. It was also not clear if this is the first time Julian Robertson has "disowned" a former Tiger Seed and if his departure will prompt the rest of her LPs to follow suit.

Fannie, Freddie Plunge After Court Rules Hedge Funds Can't Sue

Moments ago, the stocks of the nationalized GSEs - Fannies and Freddie - tumbled by over 30%, after a federal appeals court upheld a ruling that barred hedge funds from suing to overturn the U.S. government’s 2012 decision to capture billions of dollars in the profits generated by the mortgage guarantors Fannie Mae and Freddie Mac after their bailout.

According to Bloomberg, which first reported the ruling, some Fannie Mae and Freddie Mac investors still have a shot at money damages, based on when they acquired their shares and whether they did so before or after the Federal Housing Finance Agency was created and then imposed its control over Fannie Mae and Freddie Mac. They can pursue breach of contract claims, the appeals panel said in a split 2-1 decision Tuesday.

“It’s a little too early for me to announce what our response will be other than to say what these breach of contract claims were always the central claims in this case,” said Hamish Hume, a Washington-based attorney with Boies Schiller Flexner LLP, who represented some of the prevailing shareholders.

In place since January 2013, the controversial net worth sweep allowed the U.S. to recapture all of the $187 billion in taxpayer money it spent to stave off the companies’ collapse during the global fiscal crisis and as of 2016, at least $56 billion more. All of that without reducing Treasury’s liquidation stake in either firm.

As Bloomberg adds, the court, which included two judges selected by Republican presidents and one picked by a Democrat, heard arguments on April 15. It later allowed additional friend-of-the-court briefs to be filed by allies on each side, solicited still more submissions concerning a jurisdictional question and permitted the investors’ filing of evidence produced in sweep-related cases pending before other courts. Their ruling may yet be subject to U.S. Supreme Court review.

The U.S. Treasury Department press office did not immediately reply to an e-mailed request for comment. David Thompson, an attorney for the suing Fairholme Funds Inc. did not immediately respond to a voice-mail message seeking comment.

The appellate decision follows Fannie Mae’s Nov. 3 report in which it said it made a $3.2 billion profit in the third quarter of 2016, the company’s 19th straight quarterly profit. Those profits were more than the $1.96 billion earned in the same quarter a year earlier. The company had said it would send $3 billion to the Treasury in December, bringing its total payments to $154.4 billion.

Two days earlier, the smaller Freddie Mac said it made a $2.3 billion profit during the third quarter of this year and would send the same amount to the U.S.

Sweep terms let the companies retain an annually diminishing capital buffer that phases out in 2018, meaning any losses later sustained will require one or both to draw on taxpayer funds.

Meanwhile, some prominent hedge funds investors - most notably Bill Ackman and Richard Perry -  have been actively pushing the government to revert to the GSE status quo, as existed prior to the 2008 bailouts, convinced it would unlock substantial stakeholder value. Today, however, that won"t be the case.