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American hedge fund manager Paul Singer has a fearsome and well-deserved reputation for playing hardball. He was born in 1944 in New Jersey in a Jewish family. Interestingly, he began his career in Wall Street as a lawyer. He obtained his B.S. in psychology from the University of Rochester in 1966 and a J.D. from Harvard Law School in 1969. Singer joined the real estate division of the investment bank Donaldson, Lufkin & Jenrette as an attorney in 1974. However his success in personal investing pushed him to start Elliot Management in 1977. He began with a modest corpus of $1.3 million.
Investment Philosophy
Paul Singer is not a man to be trifled with. There is hardly any other investment manager who plays as rough as he does. He does not believe in merely purchasing bonds and stocks and patiently waiting for them to increase in value. He believes in direct action. He acquires stakes in companies to such an extent that he can influence the policy of the target company, including commercial deals, pushing for changes in management and also ruthlessly pursuing his interests by prosecuting court cases.
Investment Strategy
Paul Singer's investment strategy can be best laid out in his own words, from his letters to investors.
Here are the five pieces advice, which come in no particular order:
No security price is too high (or low) that it cannot go higher (or lower); Turns in markets are impossible to time; Big changes in market prices frequently occur far in advance of when the reasons for the changes become apparent, and by then it is too late to incorporate the new information into one's trading at the old prices; One of the most important reasons to avoid significant losses is to avoid the painful and sometimes terminal effect of severe adversity on the quality of money managers' decision-making processes; and A wide and deep education about the world, not just about capital structures, corporate business strategies and industry dynamics, is essential to the long-term success of money managers.
"Some of these lessons needed to be actually experienced to be incorporated at a deep level in the decision-making of a team, whereas others could be gleaned second hand," the hedge fund said. (Business Insider, Rachael Levy May 26, 2017)
Elliott Management Corporation
Elliott Management now manages $33 billion in assets, while personally Singer earned $400 million in the last year. His own net worth is about $2.6 billion. The top management team at Elliott comprises of three other equity partners, portfolio manager Steven Kasoff, co-chief investment officer Jon Pollock and Singer's son Gordon who heads the London office.
The fund specialises in distressed debts purchases. In the forty years of its existence, it is said that the fund has had just two down years. "We try to make money all the time," Singer told the Wall Street Journal in October 2016, as he explained how the firm's strategy had evolved since the 1970s from a focus on convertible hedging and other relative value arbitrage to distressed investing to merger arbitrage and now to active equity investing.
"Active equity investing is a natural evolution for Elliott in trying to make something happen and control our destiny not just annoy people," he added. (www.cnbc.com. Gemma Acton 10 April 2017)
The most well-known case of his propensity for launching legal action to secure his interests is the Argentinian debt issue. The then Argentinian President Kirchner, in an effort to pare down the country's debt, offered a restructuring plan that would have seen bond holders accept significant losses. Singer and his fund refused to back down and sued Argentina in US courts with success. Then the fund convinced a court in Ghana to detain an Argentinian naval training vessel. After a change in the government, Argentina chose to settle the issue and paid Singer's fund nearly $2.4 billion, about four times the fund's initial investment.
Here is how Wikipedia describes his Peruvian debt adventure: "In 1996, Elliott bought defaulted Peruvian debt for $11.4 million. Elliott won a $58 million judgement when the ruling was overturned in 2000, and Peru had to repay the sum in full under the paripassu rule. When former president of Peru Alberto Fujimori was attempting to flee the country due to facing legal proceedings over human rights abuses and corruption, Singer ordered the confiscation of his jet and offered to let him leave the country in exchange for the $58 million payment from the treasury, an offer which Fujimori accepted. A subsequent 2002 investigation by the Government of Peru into the incident and subsequent congressional report, uncovered instances of corruption since Elliott was not legally authorized to purchase the Peruvian debt from Swiss Bank Corporation without the prior approval of the Peruvian government, and thus the purchase had occurred in breach of contract. At the same time, Elliott's representative, Jaime Pinto, had been formerly employed by the Peruvian Ministry of Economy and Financeand had contact with senior officials. According to the Wall Street Journal, the Peruvian government paid Elliott $56 million to settle the case."
Words of Wisdom
Almost $500 billion flowed from active to passive funds in the first half of 2017. Paul Singer contends that passive strategies, which buy a variety of securities to match the overall performance of an index, aren't truly "investing" and that index fund providers don't have incentive to push companies to change for the better and create shareholder value. "Passive investing is in danger of devouring capitalism," Singer wrote in his firm's second-quarter letter dated July 27. "What may have been a clever idea in its infancy has grown into a blob which is destructive to the growth-creating and consensus-building prospects of free market capitalism."
"In a passive investing world, small shareholders have little-to-no voice and no realistic possibility of banding together, while the biggest shareholders have no (repeat, no) skin in the game so long as the money manager does not underperform the index by five-hundredths of a percentage point, in which case the customer calls up the money manager and starts yelling," the letter said. There's a real likelihood that passive investing "and its apparent stability, is unsustainable and brittle."
A de-linkage of stock and bond prices may be coming soon, if an expanding economy spurs inflation, making yields unsatisfactory to investors. Growth and inflation may climb together if rising rates are seen as a sign of confidence in the economy.
"The Fed's (and other major central banks') obvious determination not to let equity markets fall may be the chief underpinning of investors' willingness to hold (and accumulate more) equities even at current relatively elevated levels," the firm said.
On whether the labour market is tight: "Short answer: no," Singer wrote. Long-term government benefit programs provide strong disincentives for people to work or even seek employment, and these people often disappear from employment statistics. It's hard for workers to be retrained, he said. Slow wage growth demonstrates that there's more slack in the job market than there may appear. On Chinese debt: In the event of a Chinese financial collapse, "large flows of capital during any unwind of highly leveraged institutions and structures would go coursing through the global economy and financial system like a wild tsunami," Singer wrote. Even if the government were successful at instituting capital controls, this would remove China from the demand side of the global economic picture. On safe spaces: Singer said in the letter that safe spaces are created so "fragile-as-eggshells students are not 'assaulted' by opinions or thoughts that differ from those in their 'Little Red Books.'" He compares this to central bankers who are "treating every single hiccup and little twitch in global stock markets as worthy of calming words and the promise of action 'as needed.'"
Content is prepared by Wealth Forum and should not be construed as an opinion of HDFC Mutual Fund.
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