The Financial Life: Seth Klarman

Some hedge fund managers are famous for big scores—John Paulson made $15 billion shorting the housing market. Then there's Seth Klarman, who got rich by making money steadily over time. As markets began to collapse in 2008, the founder of Baupost Group focused on corporate bonds he calculated would yield solid returns even if the economy got worse. "We didn't have the degree of conviction Paulson had," says Klarman, 53, in an interview in his Boston office. "We don't deal in absolutes. We deal in probabilities."

Baupost has returned 19 percent a year, net of fees, since Klarman started it in 1983, vs. 11 percent for the Standard & Poor's 500-stock index. His record helped Klarman almost double Baupost's assets, to $22 billion, over the past two years—a period when the hedge fund industry was seeing withdrawals. He runs more money than better-known managers such as Ken Griffin and Steven Cohen.

A value investor who looks for securities he considers underpriced, Klarman says he's best at "complicated" situations where fewer investors compete for assets. "He specializes in illiquid, complex assets," says Thomas Russo, a partner in investment firm Gardner Russo & Gardner who has known Klarman since 1984. Baupost has invested in Parisian office buildings, Russian oil companies, and real estate the U.S. government sold after the savings and loan crisis of the early 1990s, says Russo.

More recently, Klarman scored big buying the bonds of Washington Mutual and Ford Motor at deep discounts. When he can't find investments he likes, he's not afraid to sit on his hands, keeping as much as 40% of the fund in cash. Lately it has been 30%. If the firm can't come up with enough opportunities, it may return cash to investors, he says.

These days, less than 10% of Klarman's portfolio is in U.S. stocks. Except for a brief time in March 2009, he says, "stocks haven't been at bargain prices for most of the last two decades." Recently, he's been looking at privately held commercial real estate. While the fundamentals for much of that property are "terrible," he says, it may pay off for those willing to wait long enough.

After graduating from Cornell, Klarman worked for renowned value investor Michael Price; he later earned an MBA at Harvard. His views are so closely watched by investors that his out-of-print book, The Margin of Safety, published in 1991, is offered on (AMZN) for more than $1,700. Bruce Berkowitz, named Morningstar's (MORN) domestic stock manager of the decade, says Klarman stands out among fund managers because he's able to make money while holding cash and avoiding leverage. Says Berkowitz: "If he isn't Elvis, he's pretty close."


Baupost Group, with $22 billion under management


Seeks undervalued, misunderstood assets

Recent investment interest

Privately held commercial real estate

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