Wednesday, June 4, 2014

One-Man Wealth Machine?

Rob Copeland of the Wall Street Journal reports, Hedge-Fund World's One-Man Wealth Machine:
In the Back Bay neighborhood of Boston, one man is building a moneymaking machine that rivals some of the hedge-fund industry's biggest names.

Calls to his office go unreturned even from those eager to fork over eight-figure sums, potential investors say. One industry veteran referred to him as "a unicorn," as few people have ever seen him.

The hedge-fund manager, David Abrams, has personally become a billionaire, and earned billions more for his wealthy investors, over the past five years running what is effectively a one-man shop, according to company and investor documents reviewed by The Wall Street Journal and people who have worked with him. His firm, Abrams Capital Management LP, manages nearly $8 billion across three funds and is discussing raising money for a fourth fund that could help push its assets past $10 billion.

In an era of star investors who appear regularly on television and talk up their ideas at hyped confabs, Mr. Abrams, 53 years old, has never spoken at an event open to the public.

"He probably would have preferred you not find him," said Roger Brown, president of Berklee College of Music, where Mr. Abrams is a trustee.

Abrams Capital's main funds have posted an average annualized return of about 15% since its founding in 1999, documents show, nearly double the average for hedge funds tracked by HFR Inc. and triple the S&P 500 index, including dividends.

The firm invests in a relatively small number of beaten-down companies at a time, mostly through stocks at present, though it has also dipped into some of the more-talked-about fixed-income deals of recent years, including the unwinding of bankrupt Enron Corp. Among its recent stockholdings have been bookseller Barnes & Noble Inc., retailer J.C. Penney Co. and money-transfer firm Western Union Co., securities filings and investor documents show.

Mr. Abrams also is among the small group of investors that has taken a big bet on government-controlled mortgage companies Fannie Mae and Freddie Mac, wagering that the Obama administration's plan to wind down and replace the entities will fail, according to investor documents.

The firm employs three analysts and a small back-office staff, but Mr. Abrams approves all trades personally, according to people that have worked with him. Other firms of comparable assets can have hundreds of employees.

He also built his fortune with the equivalent of one hand tied behind his back: His firm uses no leverage, or borrowed money, and often sits on billions in cash. It currently holds about 40% of its $8 billion under management in cash, investor updates show.

Mr. Abrams got his start in 1988 at Baupost Group LLC, also based in Boston. Run by Seth Klarman, Baupost is one of the world's largest hedge-fund firms, with $27 billion under management.

The two remain friends, and Mr. Klarman's personal foundation has put money into Abrams Capital's funds. Mr. Klarman described his protégé as "smart as a whip."

"He loves a good puzzle and a good treasure hunt," Mr. Klarman said.

People who have worked with him said the University of Pennsylvania graduate who majored in history is introverted and cerebral. The son of a stockbroker and psychotherapist and a father of two, he is an avid follower of jazz music and fan of the band Earth, Wind and Fire.

Like Mr. Klarman, Mr. Abrams is known to be patient to the extreme. He will sit on a static portfolio for months without making a move.

Investors in the firm, including institutions like Brandeis University, with an endowment of about $700 million, sometimes get scant information. Mr. Abrams's most recent quarterly letter consists of just six paragraphs, one of which is a single sentence.

"He's not going to waste a nanosecond to impress you, or convince you, or argue with you," said Mr. Brown of Berklee. "He knows what he thinks and if you ask him, he'll tell you. If you don't, he might just sit there in silence."

Mr. Abrams likely collected more than $400 million last year on the back of a 23% return for one of his main funds, according to Journal calculations based on his fees, performance and his personal investment in the firm. He doesn't appear on lists of top-paid hedge-fund managers because his performance figures are so closely guarded, but his estimated compensation last year would have put him ahead of David Einhorn, Daniel Och and even Mr. Klarman, according to industry publication Institutional Investor's Alpha.

A portion of his earnings came from a private-equity-style vehicle, which doesn't pay out gains until it is unwound, and a handful of firm executives may have shared a small slice of his payday. The hedge funds were up an additional 2% in the first quarter, investor documents show.

As a side gig, in 2007 Mr. Abrams was part of a group that bought a 20% stake in the National Football League's Oakland Raiders. Forbes estimates the team's worth at $825 million, the NFL's least valuable team. Before the purchase, he wasn't a big football fan but views the team as a distressed investment, a person close to him said. The person said Mr. Abrams prefers to play squash at the University Club of Boston.
So who is David Abrams? Is he the real deal or just another Bernie Madoff? No, he's not a crook. Just like his mentor, Seth Klarman, he's a deep value investor who charges hedge fund fees to pick undervalued stocks. I did some digging and  found the institutional holdings of Abrams Capital Management (click on image below):


As of the end of March, the fund invested roughly $1.3 billion in just 14 companies. His top four positions are well known companies like Western Union (WU), American International Group (AIG), Wells Fargo (WFC), and Microsoft (MSFT). But the fund also invested in lesser known companies like Navient Corporation (NAVI), SLM Corporation (SLM), and CST Brands (CST).

Who does David Abrams remind me of? He reminds me of another great deep value Jewish investor, Bruce Berkowitz of Fairholme Capital Management who is also posting amazing returns. And the fact that he's Seth Klarman's protégé speaks volumes to me, so I decided to include Abrams Capital Management in my quarterly review of top funds' activity.

What do all these top investors have in common? For one, they're definitely not closet indexers. They're not afraid to buy beaten-down companies and hold them for months or even years (Berkowitz bought AIG before everyone else when nobody wanted to touch it). They have conviction and they stick with their plan and keep things simple. In the case of Mr. Abrams, he doesn't even use leverage to juice his returns.

What else do I like about Mr. Abrams? Unlike the David Tepper, who is constantly being glorified in the media, he's not schmoozing with Stephanie Ruhle on television, going on CNBC to make big proclamations trying to scare investors so he can buy stocks on the cheap. Abrams shuns the media, keeps a very low profile and just delivers outstanding returns to his investors.

All you "superstar" hedge fund gurus can learn from David Abrams. Please follow my advice, shut your big mouths, stop parading in front of the cameras, suck up your big fat egos because at the end of the day, you are all overpaid asset gatherers charging alpha fees for leveraged beta. You're also lucky there are an plenty of dumb public pension funds following the silly advice of useless investment consultants, gambling big on alternatives, allowing you marketing geniuses to amass extraordinary wealth.

In fact, I read an article in Reuters stating that the top 500 hedge funds now control 90 percent of the industry's assets:
The 505 largest hedge fund managers in the world, each with more than $1 billion under management, control 90 percent of the industry's assets, research by Preqin showed on Thursday.

They collectively manage $2.39 trillion of the industry's $2.66 trillion in assets but account for just 11 percent of active firms, the industry tracker said in a statement.

"The increase in hedge fund assets is being driven by allocations from the largest investors in hedge funds, those which currently allocate more than $1 billion to the asset class," said Amy Bensted, head of hedge funds products.

"With these investors allocating approximately $650 billion to hedge funds, an 18 percent increase from this time last year, it will be important for hedge fund managers to attract inflows from these prominent institutional investors," she added.

Public pension funds make up 25 percent of the money invested by those institutions, with sovereign wealth funds at 16 percent, up from 7 percent a year earlier, and private sector pension funds making up 15 percent.

More than half of that capital is from institutions in North America, although this is down from 67 percent in May 2013, as institutions in other areas increase their allocations, Preqin said.

Investors into the $1 billion plus club require, on average, a fund track record of 2.9 years and a minimum assets under management of $700 million before they will invest, Preqin said, with equity long/short and macro the most popular strategies.

By the way, the same nonsense is going in private markets. aiCIO reports that global capital for private investments is being deployed slower than it is being gathered, resulting in higher than usual dry powder and indicating investors should take care.

It never ceases to amaze me how dumb pension funds and sovereign wealth funds keep herding into the same funds, chasing yield. They're all going to get clobbered and I'm going to sit back, smirk and enjoy watching the alternatives destruction. Well, not really, after all this is pension money which people rely to retire on.

Listen to me carefully, what you want is to find as many low profile managers like David Abrams posting solid returns before they get discovered by the herd. The problem is they aren't a dime a dozen. There are guys like Budge Collins of Collins BIS who travel the world to find undiscovered talent (Ontario Teachers and others use his services) but it's a tough job and I'm not sure Budge has that many undiscovered gems.

What I can tell you is guys like Budge Collins get paid a lot of money for the services they provide. My blog is free and I want to keep it open so many of you can learn from my experience but I would appreciate your financial support. Let's be honest, nobody in the industry has the balls and brains to write these comments and keep hammering away like I do for years, which is why hundreds of institutions keep reading my comments every single day.

Please take the time to subscribe and/or donate to my blog on the top right-hand side. There is a tremendous amount of work that goes into reading, researching and writing these comments. 


Below, WSJ's Rob Copeland profiles David Abrams, the hedge-fund world's one-man wealth machine, whose main funds have averaged a 15% annualized return over the past 15 years.