Hedge Funds Switch Gears in Q4?

Azam Ahmed of DealBook blog reports, Hedge Funds Switch Positions, While Paulson Switches Investing Style:

It’s that time of the year when managers of hedge funds big and small disclose what stocks they own. While the quarterly data look backward — the filings made Tuesday are for holdings through year-end — they offer avid watchers a sense of what the most prominent investors are doing in the industry.

Lone Pine Capital, a highly respected hedge fund run by Stephen F. Mandel Jr., bought up a big chunk of the SPDR gold exchange, worth about $570 million. Gold has been a favorite among hedge fund managers, especially among those with dour views on the United States economy.

Mr. Mandel also took positions in Baidu, the Chinese Internet search engine, worth about $280 million, and a more than $200 million position in the yoga-wear company Lululemon. He increased his stakes in Priceline.com, Google and Visa. Mr, Mandel sold off about 24 million shares of the News Corporation, or about $376 million worth.

At Appaloosa Management, the hedge fund’s founder, David Tepper, took on small, new positions in Boston Scientific and Oracle, while adding to his holdings of the hedge fund (and consumer) favorite Apple as well as General Motors. Mr. Tepper sold stakes in US Airways, Valero Energy and Macy’s.

David Einhorn of Greenlight Capital, meanwhile, bought 14 million shares of Dell worth about $200 million in the last quarter of the year, while also picking up about 17 million shares in Xerox (worth $134 million). No surprise that the manager increased his stakes in Apple and G.M. (just as Mr. Tepper did). Mr. Einhorn now has a roughly $600 million position in Apple, and a nearly $400 million position in G.M.

John Paulson, the founder of the hedge fund Paulson & Company, spent the last quarter of the year shedding shares in banks and financial firms that had become something of an albatross for him. He sold about $643 million worth of Citigroup shares and almost $400 million in Bank of America shares. He also reduced his holdings in Wells Fargo, Capital One and Suntrust Banks. Mr. Paulson suffered the worst year of his investing career in 2011, when one of his main funds lost more than 50 percent on ill-timed bets and other investing catastrophes.

As he looks to reclaim those huge losses, which could require gains of more than 100 percent in some funds, he took on a few new positions while raising his stake in others. Mr. Paulson now owns about $1.1 billion worth of Delphi Automotive, the once-bankrupt car-parts manufacturer. He also owns about $100 million worth of the energy company El Paso Corporation.

But what Mr. Paulson really seems to be interested in these days is jostling the Hartford Financial insurance company, whose share price has plummeted about 30 percent over the last year. The investor took the company to task for its lagging performance during its fourth-quarter earnings call last week, and is circulating presentations about how a breakup of the company could increase the share price by as much as 60 percent.

The hedge fund is taking its case to the market, significantly raising its stake (it now owns about 8.4 percent of outstanding shares, according to a regulatory filing Tuesday) while it campaigns to force the firm to separate its property and casualty insurance business from its life insurance business.

“Hartford trades at 44% of book value compared to 81% for life peers and 106% for P&C peers” reads a headline from a Feb. 14 presentation about the company.

The moves ring of activism, a strategy practiced by many a hedge fund manager, from the old school raider Carl C. Icahn to his figurative heir, William A. Ackman. But it is a new strategy for Mr. Paulson, who has largely stuck to merger arbitrage and is best known for his credit bet against the subprime mortgage market that earned him billions of dollars.

Why exactly Mr. Paulson has decided to add to his repertoire is unclear. But he seems familiar with the playbook. In his filing Tuesday, Paulson & Company indicated it would be potentially speaking with other investors about next steps for the company.

Paulson is reeling after 2011 and has to make up a lot of performance to get back to his high-water mark before he can charge performance fees.

Getting back to Q4, Reuters reports, Hedge fund managers looked to tech in 4th quarter:

Last year was a dismal one for many U.S. hedge fund managers, but based on their year-end stock holdings, some managers were well positioned to take advantage of this year's strong start in the equity markets.

Thomas Steyer's Farallon Capital Management, for instance, added about 1 million shares of Qualcomm Inc in the fourth-quarter. Shares of the telecommunications equipment manufacturer are up 12 percent in 2012.

Barry Rosenstein's Jana Partners loaded up on 650,000 shares of Netflix in the fourth quarter, when the Internet TV and DVD delivery company's shares were taking a pounding. It was a shrewd move: The company's shares are up 77 percent this year.

Managers including David Einhorn of Greenlight Capital and David Tepper of Appaloosa Management loaded up on shares of Apple Inc. Shares of the tech darling have been on fire this year, rising to an all-time high of $509, a 26 percent increase since the start of the year.

But not every manager was as foresighted.

Philippe Laffont's Coatue Management decreased its stake in Apple by 54,000 shares to a total of 1.28 million at the end of last year.

The quarterly disclosures of manager stock holdings -- in so-called 13F filings with the U.S. Securities and Exchange Commission -- is always intriguing for investors trying to divine a pattern in what savvy traders are selling and buying.

But relying on the filings to develop an investment strategy comes with some peril because the disclosures are backward looking and come out 45 days after the end of each quarter.

Still, the filings can offer a glimpse into what hedge fund managers saw as opportunities to make money on the long side. The filings don't disclose short positions -- bets that a stock will fall in price. And there's also little disclosure on bonds and other securities that don't trade on exchanges.

The SEC also permits managers to omit sensitive stock positions from 13F filings upon request. As a result the public filings don't always present a complete picture of a manager's stock holdings.

Here then are some of the hot stocks and sectors in which hedge fund managers either took new positions or exited from in the fourth quarter.

HEALTH CARE

Louis Bacon's Moore Capital Management got rid of its 2.7 million shares of Pfizer Inc, which had been one of the hedge fund's largest positions in the third quarter.

He wasn't alone. George Soros's Soros Fund Management cut shares of Pfizer to 22,837 from 666,700 shares in the third quarter. Mark Kingdon's Kingdon Capital also reduced its Pfizer position, shedding some 200,000 shares in the period.

FINANCIALS

John Paulson's Paulson & Co made some notable changes in financial stocks, which had caused him to stumble badly last year. He no longer listed Citigroup, in which he owned 25 million shares at the end of the third quarter. And he trimmed his stake in Capital One Financial Corp, after adding shares during the third quarter. At the end of the fourth quarter he owned 13.3 million, down from 22.2 million.

Paulson, in the fourth quarter, also got rid of its remaining 64 million shares of Bank of America, a stock that had been one of the hedge fund's most problematic last year.

Eric Mindich's Eton Park accumulated 20 million shares of Bank of America in the fourth quarter, putting his fund in line to benefit from the 48 percent surge in the Charlotte, North Carolina lender's stock this year. In the third quarter, Eton Park only had a call option on 2.5 million shares of BofA stock.

Conversely, Caxton Associates reduced its holdings of BofA shares from 9 million shares in the third quarter -- its largest holding by market value -- to 615,700 by the end of the fourth quarter.

Famed short-seller James Chanos' Kynikos Associates opened a long position in JPMorgan Chase by accumulating 145,000 shares of the big bank.

Dinakar Singh's TPG-Axon Capital Management also took a new stake in JPMorgan, adding 2.6 million shares in the fourth quarter.

TECH

Apple was the flavor of the fourth quarter. Soros, Einhorn and Tepper increased their exposure right ahead of Apple's roughly $100 a share run-up this year.

Appaloosa raised its share stake in Apple by 377 percent to 181,850 shares; Greenlight bought 150,000 shares to end the quarter with 1.5 million shares, while Soros increased its exposure to 95,000 from 83,417.

Moore Capital and Dan Loeb's Third Point dramatically upped their stake in Yahoo, with Moore's exposure at 1.3 million shares by the end of December from 172,000 shares in the third quarter. Third Point increased its stake in Yahoo to 56 million in the fourth quarter from 48 million.

Marvell Technology Group attracted some fans as well. Greenlight Capital added more than 700,000 shares while Maverick increased its exposure from 15.1 million in the third quarter to 19.9 million by the end of December. Third Point entered in a new stake of 10 million shares in Marvell.

Jana upped its position in travel search company Expedia to 3 million shares from 980,000 in the third quarter.

Eton Park increased its stake in online auction firm Ebay by about 750,000 shares.

IPOs

Coatue took on 50,000 shares of online coupon company Groupon, which went public in November.

Chase Coleman's Tiger Global Management acquired 325,000 shares of Michael Kors, a high-end retailer that went public in December.

HOUSING

Pershing Square Capital Management's William Ackman appeared to turn his back on the housing market when he no longer listed home improvement store Lowes Companies Inc. on his quarterly filing. At the end of the third quarter he owned 21.2 million shares.

MOMENTUM STOCKS

Coatue, one of the 10 biggest owners of Green Mountain Coffee Roasters, cut its position in half in the quarter, leaving it with about 2 million shares. Shares of Green Mountain, which tumbled about 50 percent in the fourth quarter, have roared back 45 percent this year.

Meanwhile, Patrick McCormack's Tiger Consumer Management more than doubled its stake in Green Mountain in the fourth quarter to 1.29 million shares.

As I wrote in my comment on Malakia Capital Management, it doesn't take a genius to figure out where hedge funds placed their bets in Q4. They cranked up the risk on high beta momentum stocks, investing in everything that got clobbered in Q3 2011.

Top hedge funds piled into Apple, Google and other momentum stocks, but before you go chasing any of them, have a look at the chart of Apple at the top of my post, courtesy of Slope of Hope. Tim Knight is way too bearish and way too timid for me, but love reading his market comments:

The tech-heavy Nasdaq 100, more specifically Apple (NASDAQ: AAPL), has led the way. But how long can a company with a $500 billion market cap continue to go parabolic. An advance that has sent Apple 35% higher since December 19th....In my opinion, you have to be crazy to be buying at these levels.

Crazy? Maybe now that the stock has gone parabolic, but I can make a strong case for either side. Apple is eating up market share from its competitors, aggressively moving into the business and government sector, but I warn investors playing the Risk On/ Risk Off game, chasing momentum stocks is a full-time job in these crazy markets.

That's why I dig much deeper into 13F filings, focusing on where top funds are adding positions, paying close attention to the charts to see if price action is corroborating. Never, ever chase a stock that has gone parabolic, let it come back down to new support levels and then reevaluate.

Patience and nerves of steel are required when you're swing trading in these markets but I will go over Q4 holdings in more detail and show you where top funds are placing their bets.

Below, Berkshire Hathaway Inc. took stakes in Liberty Media Corp. and dialysis-facility owner DaVita Inc. after billionaire Warren Buffett hired Ted Weschler to help manage investments. Bloomberg's Dominic Chu and Betty Liu report on Bloomberg Television's "In The Loop." Also embedded and interesting discussion on where hedge funds invested in Q4.