Hedgies Wild About Citi
What is it about Citi that makes it attractive? I'm all about value investing, and three bucks a share is pretty cheap, but I had to say I was a little surprised by the substantial positions that have been taken in Citi by hedge funds over the past quarter.
120 different hedge funds, including those run by the likes of George Soros and John Paulson, have loaded the boat with a stock that certainly looks like a POS performance-wise. Paulson's fund increased their Citi holdings to over 500 million shares, Eton Park bought 138 million shares, and Soros upped his ante to about 100 million shares. What do these guys know that the rest of us don't?
Purchases of Citi by hedge funds outpaced sales by more than 10 to 1, and the various portfolios added a net 1.2 billion shares of Citi in the last quarter. Is a break-up of Citi in the works?
Hedge funds may be speculating on a break-up of Citigroup into individual businesses, according to Diane Garnick, a New York-based investment strategist at Invesco Ltd., which manages about $400 billion.
“The sum of the parts is worth less than each individual part,” said Garnick. “It is easier for investors to assign value to a company if it is broken up into its many component parts. In this market environment people are starting to reward single business unit companies.”
Comments
They know nothing more than
They know nothing more than what we know. Citi shares have tangible book value of $4.20 [ they are trading at 3.30 today ] . Bank stocks usually trade at 1.5X tangible. Plus most of citi's crummy assets have been written off already.
Remember that hedge funds
Remember that hedge funds don't have to disclose their short positions, so you can't learn anything from looking at the long positions only! That's the nice thing about hedge funds... you never know.
Just as an example, if they are short selling BoA at the same time (which they don't have to disclose), they are only betting on outperformance of Citi vs. BoA. This does not mean that Citi itself it a good investment, it might mean that it will just go down less than BoA.
(Not that I think Citi is a bad investment, just making my point here)
Excellent Comment HiB. Hedge
Excellent Comment HiB. Hedge Funds can make profits at the expense of common investor's emotions. This article may encourage regular Joe to buy C but he doesn't have any solid reason to buy C beside this article.
You never know....
Citi has been deemed "too big
Citi has been deemed "too big to fail". Every hedge fund knows this. The Government wants and needs Citi to stay afloat. Takes a lot of risk out of the investment.
mlamb93 wrote: Citi has been
Citi has been deemed "too big to fail". Every hedge fund knows this. The Government wants and needs Citi to stay afloat. Takes a lot of risk out of the investment.
This is along the lines that I'm thinking. Citi clearly has a backstop and it's also really the only large financial that has yet to rebound. Additionally, the deal flow in their investment banking unit seems to be solid.
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I second HiB and mlamb93's
I second HiB and mlamb93's comments. However the toobigtofail argument plays out in a more long-term manner, as I don't see Citi's stock price killing it any time soon.
I'd favor the short BofA explanation particularly since I don't see Soros or Paulson as having an investment horizon longer than 1-2 years.
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HiB - not to be a douche here
HiB - not to be a douche here but if they wanted to be on the outperformance of C over BAC, when they expect both stocks to go down, why would they bother buying C? If they think a stock will go down, they will short it. Plain and simple.
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It's called a hedge.
It's called a hedge.
Beef - You may want to read
Beef - You may want to read "When Genius Failed." Not the most challenging read, but a good book. Basically, there are to many unknown (i.e variables) on just betting if C will go down. However, to reduce the bet to a hedge between BoA and C, many variables are eliminated, plus you have down side protection.
HiB and mlamb93 - Great points.
Agree that the thesis and
Agree that the thesis and logic for the long C position is probably complicated and may potentially be some sort of a hedge but Paulson is definitely not short BofA as it is his longest non-gold position according to his most recent 13-F.
It is called Pair trade. It
It is called Pair trade. It eliminates the market risk. Go read more about pair trades.
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Educated1 wrote: Agree that
Agree that the thesis and logic for the long C position is probably complicated and may potentially be some sort of a hedge but Paulson is definitely not short BofA as it is his longest non-gold position according to his most recent 13-F.
Agreed. It was just a continuation of the example HiB made.
I was thinking that it may be
I was thinking that it may be a pair trade but it could also be something more complicated like capital structure arbritrage as he may also be in different classes of the capital structure. My only point was that the trade was not as simple as going long C and short BofA.
mlamb93 wrote: Citi has been
Citi has been deemed "too big to fail". Every hedge fund knows this. The Government wants and needs Citi to stay afloat. Takes a lot of risk out of the investment.
That shouldn't factor in to this equation, because these are equity investments, not debt investments, and the gov't has clearly shown they are willing to let equity fall to zero, even in "systemically important" institutions.(1)
I second HiB and mlamb93's comments. However the toobigtofail argument plays out in a more long-term manner, as I don't see Citi's stock price killing it any time soon.
I'd favor the short BofA explanation particularly since I don't see Soros or Paulson as having an investment horizon longer than 1-2 years.
Paulson is also long BoA,(2) so I don't see how that explanation makes sense. Also, what reason do you have for feeling C is superior to BAC?
Beef - You may want to read "When Genius Failed." Not the most challenging read, but a good book. Basically, there are to many unknown (i.e variables) on just betting if C will go down. However, to reduce the bet to a hedge between BoA and C, many variables are eliminated, plus you have down side protection.
HiB and mlamb93 - Great points.
What does LTCM have to do with this? While they did have lots of relative value convergence trades, they should hardly be held up as an example of how to "hedge" risk, and most of those positions were in fixed-income (3); the equity positions they held were based on dual-listed convergence, ie Royal Dutch v Shell converging (4).
1: http://www.marketwatch.com/investing/stock/LEHMQ
2: http://seekingalpha.com/article/155907-bank-of-ame...
3: http://www.erisk.com/Learning/CaseStudies/Long-Ter...
4: Lowenstein (2000), p. 99
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I'm not saying Paulson in
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Beef wrote: HiB - not to be a
banana awarded.
drexelalum11 - Yes, I know
ihatetaxes
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Quote: What does LTCM have to
johnnyd wrote: banana
HiB wrote: Quote: What does
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drexelalum11 wrote: Oh, I
It doesn't matter that these
read diary of a hedge fund
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Great thread. I must
No one....huh.
Any thoughts on C? News I