Spector, when trying to explain how Baupost, now with $27 billion under management, has succeeded over time at delivering a notable 17 percent annualized return since exception, addressed a common strategy point, a guiding light that does not change, a “North Star which guides everything we do.” For a fund to have a guiding principle that they can turn to in good and bad times keeps the portfolio managers, the institutional investment managers and entire staff focused during the bad times, which 2015 might be categorized as such.īaupost was down -6.6 percent through the end of September, Sabrina Willmer of Bloomberg reported. What's amazing about Baupost is how they delivered annualized returns in the teens with significant dry powder on the sidelines The individual human factor does not play as big a role as it does when investing in a hedge fund on a drawdown. General markets can be driven by emotion, to be sure, but that emotion reflects the wisdom of crowds - or more appropriately the lack of wisdom, which creates a value dispersion opportunity. After the tide goes out for a hedge fund manager, that is the worst time to tweak a strategy as emotions are likely to creep into individual perspectives. Unlike a general market, which has no individual emotion that can become a statistical outlier, investing in a hedge fund after they have experienced significant loss requires confidence that the individual fund management, often reflected in one individual at the top, won’t lose confidence, change their approach or adjust the strategy during periods of stress. Why is this? Investing in a hedge fund on a drawdown requires understanding human emotion guiding decisions in which that being invested. To effectively invest on a drawdown, investors “need to fly in the face of public opinion, you have to fight normal human emotions, and you have to be prepared to double down on your bets when your conviction is most in question,” Spector wrote.įrom one perspective investing when the “tide goes out” in the stock market is easier than investing in a hedge fund where the investor capital went out.

But in the moment, the uncertain present, the decision to invest in a hedge fund, a general market or a stock can seem uncertain at best in crisis if not the equivalent of diving off a cliff in the middle of the night without visibility into what lies below. One year from now with the comfort of hindsight the investment in Ackman’s hedge fund when all the chips are down the decision would seem clear. For instance, on a mathematical basis, investing in activist Bill Ackman would be advised. It is often a skill that is more easily discussed than actually executed. Although it is all theoretical since Seth Klarman's Baupost Group remains closed to investors.īaupost's Brian Spector addresses the “chutzpah” required to invest in an irrational stock marketĪ retiring Brian Spector, as reported by Julia La Roche of Business Insider, writing the October 15 Baupost letter to investors, noted the “chutzpah” it takes to invest in a falling and rising tide market. The question that remains un-answered after Baupost's reported negative year to date performance is: Did the potential king of finding value in drawdowns, the value investor that has a history of delivering annualized average performance in the mid teens while keeping significant cash on the sidelines - did this hedge fund follow its investing 'North Star' and invest on a drawdown in October? That answer remains elusive, one perhaps answered in a short period of time that might point to the 'emperor of drawdown value investing' to rival the ' bond king.' The answer was not provided, but the question was set up in a recent Baupost letter to investors reviewed by ValueWalk.

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