Hedge Fund Clients Pulled $7 Billion From Elite Money Manager Since 2021
1 / 2
Hedge Fund Clients Pulled $7 Billion From Elite Money Manager Since 2021
Katherine Burton
4 min read
(Bloomberg) -- Clients of Seth Klarman’s Baupost Group pulled roughly $7 billion from the hedge fund in the past three years, losing patience with the famed value investor after a decade of lackluster returns.
Baupost, once among the best-performing hedge funds, gained only about 4% a year since 2014, according to investors. The $23 billion firm’s performance over that decade is about a fifth of its historic returns, lagging behind other multistrategy hedge funds and a blended stock and bond index fund.
It lost money in three of those 10 years — though the steepest drop was less than 5% — as a sustained period of low interest rates and a soaring stock market resulted in fewer of the distressed plays where Klarman shines.
In a bid to boost performance, Baupost said in June that it cut almost 20% of its investing team — the biggest cull in its 42-year history. The reductions aimed to refocus on what had traditionally been its most successful strategies: distressed debt and special situations, event-driven equities, private investments and providing financing to companies.
“With a somewhat smaller investment team, we have increased the level of energy, focus, accountability, and collaboration,” Klarman wrote in a year-end client letter, which served as a progress report on the firm’s turnaround efforts.
So far, Baupost is starting to move in the right direction. The fund climbed about 10% last year, according to investors, its first double-digit gain since 2021. That still trailed many of its multistrategy peers and fell far below its historic average.
The Boston-based firm declined to comment.
Safety Margin
That clients stuck it out for so long reflects Klarman’s vaunted place among hedge fund founders. The billionaire, 67, has been running Baupost since 1982 and literally wrote the book on value investing.
A signed first edition of his 1991 classic, “Margin of Safety,” sells for $9,500. The title refers to the rule of always buying securities at a discount to their true value, giving buyers the titular margin of safety if their analysis proves overly optimistic.
Early on, Klarman’s method excelled. In Baupost’s first 26 years, it returned an annualized 20%, the Harvard Business School alumni magazine reported in 2008. The firm’s assets under management peaked at around $30 billion, primarily though compounding, rather than drawing new client cash.
Yet during the past few years, some institutional clients grew frustrated with the stubbornly low returns and yanked their money. Assets dropped from $28.8 billion at the end of 2021 to roughly $23 billion, even after last year’s gain.
Klarman has always run Baupost like the multifamily office that he joined in 1982 out of Harvard Business School, when it oversaw just $27 million. Avoiding losses took precedence over making a big score.
He sits on the sidelines if he doesn’t see bargains, at times holding a cash pile of as much as 30% of his assets. Klarman regularly tells investors that Baupost will always underperform a roaring bull market.
And that’s exactly what happened in the past decade, with its historically low interest rates that buoyed many companies — regardless of whether their businesses were sound.
But unlike some other value investors, Baupost didn’t mitigate the worst effects of the bad environment. It made some unforced errors, too. The firm expanded beyond where it had traditionally been successful, and allowed certain portfolio managers to become too siloed, Baupost has told investors.
Interest Rates
In late 2023, Klarman and his partners started to talk about how to redirect the firm. While it kept its four areas of focus — public equity, public credit, private equity and debt and real estate — it narrowed the types of investments it would make.
In real estate, some deals had taken a hit as interest rates rose. But Baupost started finding additional bargains in 2024, putting more money to work that year than it did in 2022 or 2023.
It has also pared back its wagers in public equities, where the firm struggled to make money in recent years. At one point it owned almost a quarter of Viasat Inc., a satellite communications company whose shares have tumbled about 90% from their May 2019 peak.
Meanwhile, rising interest rates have helped the firm find more distressed companies to back. Baupost has increased its credit investments to almost a quarter of assets, up from 5% two years ago. Cash is now around 10%.
While Klarman plans to stay put for many years, he has begun preparing for succession by pushing certain partners to oversee small sections of the portfolio, according to people who know him.
He’s also encouraging partners to think more holistically about the portfolio. That includes not only pitching what they want to buy, but considering what they’d sell to finance those purchases. And he’s making members of his team debate one another’s investments.
Altogether, Klarman told clients that he’s more optimistic about the firm’s chances for making money.
“These changes have left us increasingly excited about the current portfolio and our ability to uncover attractive investments going forward,” he wrote in the client letter.
