Where Are Hedge Funds Placing Their Bets?

Quarterly filings were released on Monday and all eyes are on star hedge fund managers. The WSJ reports, Paulson Adds Goldman Sachs, Other Financial Stakes:

Hedge fund manager John Paulson continued to add to his holdings in the U.S. financial services industry with new stakes in Goldman Sachs Group Inc. (GS), mortgage insurer PMI Group Inc. (PMI) and regional bank Popular Inc. (BPOP).

Paulson, who runs Paulson & Co., reported in a quarterly filing with the Securities and Exchange Commission that he added a new position with 30 million Bank of America Corp. (BAC) warrants, increased his holdings in common stock of Wells Fargo & Co. (WFC) by 4.5 million shares to 17.5 million, and raised his holdings in Hartford Financial Services Group Inc. (HIG) by more than 31 million shares to 44 million.

But Paulson reported reducing its stake in CIT Group Inc. (CIT) by just over one million shares, to 3.3 million.

Paulson was among the first big hedge fund managers to build a stake in banks late last year, reversing course after winning big in betting against subprime mortgages during the financial meltdown. Last year, for example, he bought Citigroup Inc. (C) stock and continues to hold more than 500 million shares.

Over the last three months, Paulson bought 1.1 million Goldman Sachs shares, more than 66 million shares in Puerto Rico bank Popular, and 5 million shares in PMI.

Paulson maintained his holdings in gold companies, and added a variety of sectors to his portfolio, including 5 million shares in McClatchy Co. (MNI) and 8 million shares in Strategic Hotels & Resorts Inc. (BEE). He increased his stake in large drug maker Pfizer Inc. (PFE) by 7.2 million shares, to 22.8 million, but reduced his holdings in Boston Scientific Corp. (BSX) by more than 19 million shares, to 80 million.

Paulson added several other companies in healthcare and technology, including stakes in inVentiv Health Inc. (VTIV), Mylan Inc. (MYL) and Odyssey Healthcare Inc. (ODSY).

But not everyone is bullish on financials. Reuters reports Lampert fund trims stakes in financials:

Billionaire hedge fund manager Edward Lampert further trimmed stakes he owned in major U.S. financial companies during the second quarter, a securities filing showed on Monday.

As of June 30, Lampert's ESL Investments' RBS Partners fund reduced the stakes it owned in Capital One Financial Corp, Citigroup Inc and CIT Group Inc, the filing showed, compared with holdings on March 31.

The filings also showed no holdings in two financial companies in which RBS previously listed stakes -- Wells Fargo & Co and student lender SLM Corp.

ESL tends to take concentrated positions in a few stocks and, in the first quarter, had already trimmed shares in Wells Fargo and Bank of America Corp.

Lampert himself is best-known for putting together retailers Sears Holdings Corp and Kmart five years ago. He remains chairman of Sears.

The RBS filing showed it had 3.6 million shares in CIT Group as of June 30, down from 4.5 million shares as of March 31. It had 24.6 million shares of Citigroup, down from 31 million in March. And it had 7.1 million shares of Capital One, down from 9.1 million.

RBS did raise its stake in Genworth Financial Inc to 9.1 million shares from 8.1 million shares, however.

Large investors such as Lampert are required to report their holdings of U.S.-listed securities at the end of each quarter.

They are not required to show short positions or holdings of other securities such as bonds and over-the-counter derivatives contracts. Investors may also exclude stocks they are trading or have moved to other funds.

The filing also showed lower stakes held by RBS in Sears and two other companies in which ESL is involved, AutoZone Inc and AutoNation Inc , compared with the previous quarter.

Recent regulatory filings show RBS distributed shares of those companies to various general and limited partners during the quarter.

In other activity, Bloomberg reports that billionaire Nelson Peltz disclosed that his hedge-fund group sold a $132 million stake in Kraft Foods Inc. that it bought earlier this year:

Trian Fund Management LP’s investment funds held no Kraft shares as of June 30, compared with 4.47 million shares on March 31, according to filings with the U.S. Securities and Exchange Commission on Friday. The New York-based hedge-fund group had owned as many as 34.6 million Kraft shares at the end of 2008.

New Zealand's Stuff reports from Reuters, Hedge funds find oil bargains:

Top hedge fund managers went bargain hunting in the oil patch in the second quarter, buying shares whose prices had fallen because of BP's Gulf of Mexico well disaster and lower oil prices.

Top managers including billionaire Carl Icahn, Eric Mindich and Dinakar Singh, whose stock picks are closely watched in investment circles, added energy stocks to their holdings as billions of gallons of oil gushed into the Gulf, according to quarterly securities reports filed on Monday.

Others buying energy shares included David Einhorn, former Fidelity Investments star Jeff Vinik and the US$22 billion ($31 billlion) Boston-based fund Adage Capital.

Fund managers must say what US listed equities they owned within 45 days after the quarter ends.

While energy stocks ranked among the worst performers during a quarter that also featured a still unexplained flash-crash and fresh fears that the US economy would recover more slowly, hedge fund managers staked out the sector much like they had with financial firms earlier in the year.

After building his energy holdings slowly at the beginning of the year, Icahn picked up the pace in April, May and June by committing nearly US$1 billion to the sector after the Deepwater Horizon drilling platform at BP's Macondo well exploded and sank in the Gulf of Mexico.

The purchases included 2 million shares of oil and gas producer Anadarko Petroleum and 240,000 shares of offshore drilling specialist Ensco PLC's sponsored American Depository Receipts, according to documents submitted to the Securities and Exchange Commission on Monday.

Icahn also added 2.4 million shares of NRG Energy, a big power utility.

Dinakar Singh's hedge fund TPG-Axon bought 1.4 million shares of Anadarko, while adding 2.1 million shares of drilling services specialist Baker Hughes and 3.5 million shares of Halliburton, another major oil services player.

Mindich, whose skills at Goldman Sachs helped him raise a record US$3 billion when he started his fund in 2004, bought 1.3 million shares of BP and call options to buy 1 million more.

Mindich's US$13 billion Eton Park Capital also bought 168,000 shares of Baker Hughes, 165,000 shares of Diamond Offshore Drilling, 300,000 shares of Forest Oil, 256,000 shares of Marathon Oil, 420,000 shares of Plains Exploration & Production and 237,000 shares of Suncor Energy.

Vinik added 3.1 million shares of Exxon Mobil, 11,000 shares of Ensco and 2 million shares of the Oil Services HOLDRS Trust, which owns a basket of 15 stocks in the sector.

Einhorn's Greenlight Capital bought 7.4 million shares of Ensco, just over 5 percent of the company's shares. Ensco "was not involved in the horrible accident, which should not materially impact the company's long-term potential," Einhorn wrote in a letter to his investors last month.

Adage, run by former managers from Harvard University's endowment, owned 3.4 million shares of BP at the end of the quarter, up from 124,000 three months earlier. The firm added to existing positions in Anadarko, Ensco and Halliburton.

The bets mark a dramatic change in their portfolios, coming as many other investors pulled their money out. BP's stock price fell over weeks until its value had fallen by half.

Even prominent mutual fund manager Fidelity Investments, where millions of Americans hold their college savings and retirement accounts, appears to have joined the trend.

Fidelity managers added 24.2 million shares of Exxon, leaving it with 74.9 million shares, making it the fifth biggest holding for Fidelity. It also added 10.9 million shares of BP.

The forms managers filed on Monday include only US-listed equity securities and related derivatives. Bonds, other securities and short positions are typically not disclosed. Managers may also omit US-listed equities under certain circumstances or file some holdings on confidential filings.

Earlier this month, FINalternatives reported that hedge funds opened the first half with modest gains, but some of the industry’s biggest players did substantially better:

Citadel Investment Group’s flagship hedge funds roared back into the black in July. The Kensington and Wellington funds each rose about 4% on the month, Dow Jones Newswires reports. The funds are now up about 1% on the year.

Kenneth Griffin wasn’t the only hedge fund mogul smiling in July. Lone Pine Capital added 5.5% on the month and is up 2% on the year, while SAC Capital Advisors’ flagship added 3.7% last month, Reuters reports.

Bridgewater Associates’ eponymous fund rose 3.5% in July to bring its year-to-date return to nearly 20%, according to The Wall Street Journal. Ellington Management’s mortgage funds rose 2% in July and are up about 11% on the year. Och-Ziff Capital Management’s flagship added 1.46%.

The (somewhat) rising tide even lifted one perennially-battered boat: Clarium Capital Management, which had been down as much as 10% this year, rose 5% in July, one month after it decided to shut down its New York office and relocate back to the San Francisco Bay Area. And Harbinger Capital Partners, whose flagship dropped nearly 11% in the first two weeks of last month, saw its newly-launched Credit Distressed Blue Line Fund edge up 0.5% on the month.

Of course, where there are winners, there are losers. RAB Capital’s flagship Special Situations Fund hit a serious bump in its road to recovery, plummeting 12.1% in July to leave it down 8.2% on the year. D.E. Shaw Group’s flagship dropped 2.7% on the month, while Brevan Howard Asset Management fell 2.3%.

Finally, FINalternatives also reported that Goldman added Millennium, Citadel High Frequency Trader:

Goldman Sachs may announce plans to shutter its proprietary trading operations any day. But in the mean time, the Wall Street giant is bolstering the business with the hire of a young algorithmic trader.

Asita Anche has been named a managing director on Goldman’s fixed-income, currency and commodities prop. desk, Financial News reports. She joins the firm from Millennium Capital Partners and formerly worked at Citadel Investment Group.

Anche, who specializes in high-frequency trading, will design algorithms for trading fixed-income products at Goldman. She spent more than four years working on HFT at Citadel before joining Millennium as a managing partner a year ago.

You can learn more on "high frequency trading" and how it distorts market prices and volume by reading this article and especially by reading Zero Hedge's excellent comments on high frequency trading (they were the first to cover this activity in detail). Alpha is a tough business and the top hedge funds are always looking for an "edge" to compete with each other.

I track hedge funds' quarterly filings very closely and pay particular attention to small and mid cap holdings. But I'm also cognizant that these big hedge funds can churn their portfolios many times in quarter, and if you're not careful, you can be left holding the bag.