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Wednesday, January 13, 2010
Usually, only the super-rich can get into hedge funds...
But I found a "backdoor" way we can invest with one of the best-performing hedge-fund managers out there.
It offers better terms than the real-deal fund and it trades at a big discount. If you're ready to do a little homework, I think it's an enormous deal. Let me show you why...
Meet fund manager Daniel Loeb... Wall Street's "Merchant of Venom."
"Daniel Loeb has positioned himself as Wall Street's merchant of venom, pillorying chief executive officers who don't make him enough money... So far Loeb's gonzo shareholder activism has made him and his investors very rich." – Bloomberg Magazine, October 2005
Daniel Loeb is probably best known for his letters publicly flogging the bosses of companies he owns... "Sometimes a good town hanging is useful to establish my reputation for future dealings with unscrupulous CEOs," he told Bloomberg.
Even though Dan may beat up on corporate CEOs, he actually takes great care of investors. And Dan's interests and his investors' are aligned... He is a major investor in his own fund.
Dan started his private hedge fund in the mid 1990s by rounding up $3.3 million, mostly from people close to him. Today, he manages about $1.5 billion.
Since the inception of Dan's fund in 1996, he has beaten the stock market by an astounding average of 12 percentage points per year. He has underperformed the S&P only two years. (He still brought home positive returns those years: 8.9% and 14.4% after fees.)
Even better, Dan has delivered the investment "Holy Grail." He made these returns with significantly less volatility – significantly less risk – than the stock market.
One of the most important measures to size up in a fund manager is how well he performs in bad times. The stock market lost money from 1999 through 2009. But if you'd invested $10,000 with Daniel Loeb in that time, you'd have over $35,500 today.
He did it with his Third Point Offshore Fund. What most people don't know is,getting into this fund is as easy as buying a stock...
In 2007, Dan listed what's essentially his Third Point Fund on the London Stock Exchange (symbol on Yahoo Finance: TPOU.L).
One of the unique features of hedge funds listed on a stock exchange is they can sell at a premium or a discount to the hedge fund's actual value, based on supply and demand.
When investors panicked in late 2008 and sold everything, shares in Dan's London-listed hedge fund fell to an extraordinary 50% discount to its actual value. Then an interesting thing happened... Daniel Loeb, his employees, and his hedge fund started buying shares on the London Stock Exchange. Dan knows a bargain when he sees it. He could buy his own fund for a 50% discount. So he bought!
I told our lifetime paid subscribers about this opportunity soon after, and the fund has soared 50% since then. But it's still a great opportunity now...
Today, the London-listed shares are trading at about a 20% discount to the actual value of the fund. Said another way, you can invest alongside Dan for 80 cents on the dollar.
And you can make a good argument that buying his fund on the stock market is worth a premium, not a discount... that it's better than buying the real fund.
Chances are, you're limited to exiting Dan's hedge fund only 12 times a year. Yet with this "backdoor" fund trading in London, you can sell your shares whenever the market is open.
With Dan's private hedge fund, you have to be "accredited" (rich) to buy it directly. But through the London Stock Exchange, you can buy shares through your broker, just like a stock. You can invest just a few hundred dollars if you want, instead of the typical million-dollar minimum to invest in a hedge fund.
The super-rich who invest a million dollars today directly with Dan in his private hedge fund don't get the 20% discount AND they must pay a performance fee. But this "backdoor" way through the London-listed shares gets around both of those. Dan won't start earning his regular performance fee on the London-listed fund until it's trading for around $11.50. It's currently trading near $7.
Dan's fund is around $1.5 billion in size. He has small chunks of it listed on the London Stock Exchange, denominated in British pounds, euros, and U.S. dollars. The U.S.-dollar portion has a market value over $300 million. At that size, the shares are liquid enough to trade.
I'm not sure of the legal aspects of owning shares of offshore hedge funds. You can check with your broker. But ideas like this one are worth pursuing...
Dan Loeb's Third Point London listing is a backdoor way to get into one of the world's best- performing hedge funds... minus the big performance fees... and at a 20% discount.
While it will require a bit more work to figure out than buying shares of Microsoft, chances are great it's worth the effort...
P.S. Dan's fund is one of a handful of offshore-listed hedge funds worth looking into. My friend Meb Faber (www.mebanefaber.com) describes the ins and outs of buying offshore-listed hedge funds in his excellent book The Ivy Portfolio (www.theivyportfolio.com).
THE CHINA STORY IS FALTERING
There's a small controversy in the world of financial gurus this week.
On one side, you have Jim Chanos, one of the world's greatest "forensic accountants." Chanos was the first guy to unravel Enron's fraudulent books... and he's made a ton of money betting against credit and spending excesses. Chanos says China's economy is a credit bubble waiting to explode (read the full story here).
On the other side, you have Jim Rogers. The legendary hedge-fund manager is one of the biggest China bulls you'll ever find. He literally wrote the book on being a bull in China, which is naturally called A Bull in China. Rogers says China bubble fears are overblown.
It's a big story with big implications. A China crash would hammer stock and commodity prices around the world. We can track this potential crash with the "Dow Industrials of China," the Shanghai Composite Index.
As you can see from today's chart, this index enjoyed a monster rally in 2009, which peaked in August. And despite the terrific growth headlines surrounding the country, the index has "bumped its head" around 3,300 three times in the past three months. If further weakness takes the index below its short-term low around 2,700, it would put the market on the side of Mr. Chanos. We'll keep you updated...
In The Daily Crux