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Highfields Capital to return up to $2 billion to clients

By Svea Herbst-Bayliss

BOSTON (Reuters) - Highfields Capital, which oversees $13 billion in assets for universities, hospitals and wealthy investors, plans to return as much as $2 billion to clients because it believes it can deliver better returns with less money.

The Boston-based money manager is the second prominent investment firm after Baupost Group to decide since September to shrink its capital as low interest rates and a strong stock market make it tougher to find new investments.

Decisions by top investment firms to limit access might prove disappointing for institutional investors, who have been increasingly seeking access to hedge funds as a safe and low-volatility option in a tricky investing landscape, but might now be shut out.

"While we are quite comfortable with our ability to generate good returns at our current size, we would rather be slightly smaller and generate better ones," Jonathon Jacobson, who co-founded Highfields in 1998, wrote in a letter sent to investors and seen by Reuters.

He said Highfields will stop accepting new money at the end of the year and will likely return between 5 percent and 15 percent of its capital to clients.

Highfields gained roughly 18 percent after fees through the end of September, a source close to the firm said, swelling its assets, but making Jacobson's investment team's job harder. Highfields now wants to be closer in size to what it managed at the start of 2013, the letter said.

Like other managers who have worried aloud about where to find the next top investment, Jacobson, whose firm listed 102 U.S. stock positions at the end of the second quarter, said a strong stock market factored into his decision to slim down.

"It has become increasingly difficult to find new compelling investments given today's low interest rates and how much equity multiples have expanded over the past 12 months," he wrote.

Jacobson also noted that Highfields will find itself sitting on a much bigger stack of cash that it needs to deploy in the coming year after many bets worked out well.

"As a handful of hard catalysts in some of our existing positions have come to fruition and with the continued run-off of our credit book, we foresee 15-20 percent (and perhaps more) of the current portfolio turning into cash over the next 12-18 months," he wrote.

Jacobson and his team have already started to take some profits from successful positions. For example, in the second quarter, the firm trimmed its bet on lender SLM Corp , whose stock rose 44.5 percent this year. It also cut its position in United Parcel Service Inc , whose stock climbed 23.5 percent his year, regulatory filings show.

Finally, Jacobson said the firm has made money by shorting, or betting against, certain securities, but that it was becoming more difficult to make these investments as the firm grew.

BIGGER NOT BETTER

Even with a smaller size, Highfields will still rank among the $2.4 trillion hedge fund industry's biggest players in part because it is not alone in deciding it is better to be smaller and more maneuverable.

Seth Klarman's $28 billion Baupost Group, one of the world's biggest hedge funds, plans to return a yet-to-be-decided sum of money to clients at year's end, two people familiar with the Boston-based firm's plans said last month.

It would be only the second time in Klarman's 31 years of running Baupost that he is giving money back, and the reason is that it is getting tougher to put all of the cash to work, said the sources, who asked not to be named.

Daniel Loeb's $13 billion Third Point LLC also decided earlier this year to stop taking in any new money as a way of limiting the fund's size.

"High-quality managers have always endeavored to achieve a robust and sustainable capital base, but always in a manner that doesn't sacrifice their fund's return potential," said Scott Schweighauser, president of Aurora Investment Management.

Despite its size and muscle as an occasional activist investor at companies such as Canadian coffee-and-doughnut chain Tim Hortons Inc , Highfields and Jacobson work hard to stay out of the limelight. The firm seldom touts its success in being among the first investors to spot trouble at Enron before it went bankrupt, and Jacobson speaks only rarely at conferences and walks around his Back Bay office building without attracting as much as a second glance from other pedestrians.

(Reporting by Svea Herbst-Bayliss; Editing by Richard Valdmanis, Leslie Adler and Andre Grenon)

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