For a famously cautious investor, Boston hedge fund manager Seth Klarman made what seemed like a big bet on a single stock -- Idenix Pharmaceuticals Inc.
Klarman’s firm, the Baupost Group, began buying shares of Idenix in the spring of 2011 and didn’t stop until it owned more than 35 percent of the Cambridge biotech company this spring. That stake produced a huge profit for Baupost on Monday, when Idenix agreed to be bought by drug giant Merck for $3.85 billion.
As best as I can pencil out, Baupost made a bit more than $1 billion on its investment in the company working on treatments for hepatitis. The deal -- struck at a huge premium over Friday’s closing price -- increased the value of Baupost’s shares by $900 million on Monday alone.
That’s a really good day at the office.
Baupost isn’t just the largest hedge fund in Boston, with $27 billion under management. It’s one of the most unusual money managers in the city -- investing in all kinds of assets. It specializes in complicated situations that are hard to understand, let alone predict. Besides investing in stocks, that can mean buying real estate and distressed debt, among other things.
But Klarman is also known -- revered in some investment circles -- as an extraordinarily conservative, value-oriented investor who still manages to earn solid returns while keeping as much as 40 percent of Baupost’s money in cash. Most hedge funds keep just a few percent of their assets in cash.
“Baupost has one of the most extraordinary long-term records in the investment business,” said Jon Jacobson, founder of Highfields Capital Management, another prominent Boston hedge fund firm. “The fact that they’ve been doing it for over 30 years -- with lots of cash and a huge margin of safety -- makes it even more impressive. Seth has created enormous wealth for the families and institutions that have been lucky enough to invest with him.”
Baupost was created in 1982 by one of Klarman’s Harvard Business School professors and three other founders. They chose the relatively inexperienced Klarman to be the portfolio manager.
Over the decades, Klarman and Baupost developed an avid following. A book on investing that Klarman wrote in 1991, now long out of print, is available on Amazon.com at prices starting at $1,348.65.
Baupost’s conservative style has been especially appealing in uncertain times. The firm’s assets under management, which stood at $3.7 billion in 2003 grewto $26.7 billion a decade later.
So how does an investment like Idenix stock fit in?
For starters, it wasn’t as big a bet as it appears. Though Baupost acquired 35 percent of the company, the cost of buying that stock only amounted to roughly 1 percent of the assets it manages.
In fact, Baupost only has about 15 percent of its assets invested in domestic equities. Nearly two-thirds that money is invested in just three stocks. Think of them as big slices of one relatively small pie at Baupost.
Klarman doesn’t talk in public often and he didn’t speak with me on Monday. Even his annual letters to Baupost investors are hard to come by. But he has sounded even more concerned than usual about the current value of stocks over the past year.
Klarman has criticized of the Federal Reserve’s efforts to stimulate the economy. He worries about an artificially upbeat environment and compares it to “The Truman Show,” the movie about a pleasant place to live that’s actually manufactured for a television show.
How worried is he? Baupost decided to return $4 billion to investors at the end of last year, rather than investing the money in its funds.
Klarman's concerns about US stock prices may turn out to be well founded. But Baupost investors did very well with one particular stock Monday.
The Red Herring
Call it the antique rug caper. The owners of Danvers Rug & Oriental claim an antique Turkman rug they sent out for repairs ended up at an auction house where it sold out from under them.
Who bought it for more than $200,000? Fidelity Investments chairman Edward C. Johnson III, according to a Suffolk Superior Court lawsuit. The rug company’s Boston lawyer, Jefferson Boone, says Johnson was a “completely innocent party.” Boone says other lawyers in the case claim it was an entirely different rug sold at auction.