Paul Singer (Trades, Portfolio) runs the oldest hedge fund on Wall Street, one that is now celebrating its 40th anniversary. And his clients have had good reason to stick with him: He has delivered net average annual returns of almost 14%, but there has been a lot of drama along the way.
He has been called the toughest guy on Wall Street, and it is a reputation he does not mind having. Singer has built his success by forcing distressed debtors and the targets of activist investors to agree to his do things his way.
Who is Singer?
Born in New York in 1944, Singer received a psychology degree from the University of Rochester and a Juris Doctor from Harvard Law School. He went to work as a corporate lawyer at Donaldson, Lufkin & Jenrette in 1974.
Three years later, he started his own hedge fund, Elliott Associates L.P., using $1.3 million from friends and family members.
His first big deal involved Peruvian debt, buying $20 million worth of defaulted debt for $11.4 million in 1996. After four tumultuous years of back and forth, Singer received $58 million for the debt.
In the years between 2000 and today, Singer has been involved in various loan default situations, including high-profile cases with the Republic of Congo (through Elliott subsidiary Kensington International), Chrysler, auto parts supplier Delphi (DLPH) and the government of Argentina.
Singer has also been an activist investor, going to battle with Citrix Systems (CTXS, Financial), Arconic (ARNC, Financial) and Alcoa (AA, Financial), among others.
On another front, The Wall Street Journal gave Singer credit for early forecasting of the 2008 systemic economic crisis.
He is also a high-profile philanthropist, supporting conservative-libertarian causes, the Republican party and LGBT equality issues, as well as the defense of Israel.
Overall, he is considered a distressed debt investor, and one who will tenaciously and aggressively fight to get paid by defaulters. Singer has defended his business model by calling it "a fight against charlatans who refuse to play by the market's rules.”
What is Elliott Management?
The firm, founded by Singer in 1977, is primarily a hedge fund operator. Singer also manages nine other connected firms, including Elliott Associates L.P., Elliott International Limited and NML Capital Limited (a Cayman Islands-based subsidiary).
In its Form ADV Part 2A, Elliott reports, "Investors in the Funds include pension plans, sovereign wealth funds, university endowments, charitable organizations, funds-of-funds, insurance companies, high net worth individuals and families, and Elliott insiders.”
The "Elliott entities" are controlled by four partners, Jonathon Pollock, Gordon Singer, Steven Kasoff and Richard Ritholz. Business Insider reports Elliott is the oldest running hedge fund in the U.S.
The Form 2A also shows the Elliott entities have $64.9 billion of regulatory assets under management as of June 30. According to Singer’s GuruFocus profile page, the firm currently has just under $16 billion in equity holdings—roughly a quarter of all assets under management.
Institutional Investor’s Alpha reported in 2009 that Elliott was moving to the traditional hedge fund fee structure of a 2% management fee and a 20% performance fee.
A very large hedge fund, based on assets managed, and a firm with a broad range of investment vehicles. It deals only with institutional or near-institutional investors, and does not offer its funds to the public.
Investment strategies
Singer and Elliott list multiple strategies in their Form ADV Part 2A:
- Non-distressed debt.
- Distressed securities.
- Hedging and arbitrage.
- Equity positions.
- Private equity and private credit.
- Currency trading.
- Basis trading.
- Portfolio volatility protection.
- Real estate.
Underlying all that is the common objective of generating returns which are as high as they are consistent with minimizing losses under all market conditions. In Part 2A, they say they trade or invest in a wide variety of financial instruments: “Elliott’s trading mandates are extremely broad, and encompass virtually every type of asset, investment interest, security or property (real or personal) which can be traded or purchased.”
Further, they explain that their trading in public and private securities have certain characteristics (again, a wide variety tactics in keeping with the mission):
- Diversification of strategies.
- Diversification of positions.
- Use of capital to offset the risks of other strategies.
- What is called a "significant component" of hedging strategies.
- Profiting through frequent trading in short-term price fluctuations.
- Controlled degree of leverage. Such that the leverage fits within overall goals.
- Situations in which value can be created by an activist approach.
- Situations that have an "unusually high skewness of returns."
But in the public mind, and no doubt in the minds of many peers, mental images of Singer revolve around a hard-nosed approach to everything he does, and particularly in collecting debts and taking activist positions.
An Institutional Investor article cites several views from the Street, praising and panning Singer:
- Jeff Ubben (Trades, Portfolio) of ValueAct Capital, another activist, referred to Singer's ouster of Klaus Kleinfeld at Arconic as a "prosecutorial" tactic.
- The article's author, Michelle Celarier, writes, "... if going for the jugular is the way to maintain a strong track record, Singer is the man to do it."
- The late bankruptcy lawyer Harvey Miller said of Singer and Elliott, "They are very hard-nosed, very aggressive, and sometimes inflexible..." and "Paul Singer is a very tough guy. And his attitudes are pervasive throughout the Elliott firm. They just take a position and say, 'That's the way it has to be because we say so.'"
- Elliott partner Jonathon Pollock says, "An activist element runs through almost everything we do. Through a deeper involvement, we help drive a positive outcome."
While he is hardly friends with everyone he meets, Singer does have strategic reasons for being a tough guy. If clients’ money is at stake, he has an obligation to do all he legally and ethically can to get results. In this case, the record suggests, as will be seen below, this approach has generally worked well. But there is still that nagging question: Would carrots sometimes work better than sticks?
Holdings
ETFs, options and preferred shares get top billing among Singer's equity holdings, as shown in this GuruFocus chart:
This list shows his top 10 holdings as of June 30:
- NXP Semiconductors NV (NXPI, Financial): 8.53%
- Arconic Inc. (ARNC, Financial): 7.29%
- Hess Corp. (HES, Financial): 5.2%
- Citrix Systems Inc. (CTXS, Financial): 3.56%
- Peabody Energy Corp. (BTU, Financial): 3.26%
- CDK Global Inc. (CDK, Financial): 3.17%
- Dell-VMWare Tracking Stock V (DVMT: 2.48%
- Alcoa Corp. (AA, Financial): 2.41%
- NRG Energy Inc. (NRG, Financial): 2.13%
- Encana Corp. (ECA, Financial): 2.08%
A couple of themes stand out in this list: a sold interest in technology (but not big names such as the FAANGs) and energy, oil and gas. If he has purchased the oil and gas stocks at reasonable discounts, 2017 and perhaps 2018 could deliver outsized returns.
Performance
Singer and company are notoriously tight-lipped about keeping their thinking and their returns out of the public view.
Reuters reported in 2015 the firm was highly indignant and threatening litigation over the leaking of one of its investor letters. The warning read, "We have learned the identities of certain individuals who breached their confidentiality obligations by disclosing the contents of Elliott's quarterly reports... We are taking action and seeking monetary damages from violators."
However, inquiring minds do get the information at times. Bloomberg was able to get a copy of the second-quarter 2017 letter, which reported Singer's main fund gained 3.5% in the first half of this year. The article attributes the muted return to heavy hedging of securities.
Journalist Celarier of Institutional Investor has followed Singer since 2010, and provides this table of Elliott Associates’ (the firm’s primary domestic fund) performance:
Like other gurus who hedge intensively, Singer is bringing in underperforming returns while the markets continue to rise. Should the market take a tumble, as widely predicted, he will look wise and probably be much richer.
Conclusion
As I noted in an article about Steven Cohen, a mid-teens average annual return over decades is an impressive accomplishment. At the same time, though, a prudent investor might ask the cost of such returns.
Singer makes it clear in the firm’s investing objectives that risk management is critically important. Yet, making big bets on activist interventions or on distressed debt would concern many. Consider Bill Ackman (Trades, Portfolio)’s losses while fighting what has turned out to be a losing battle with Herbalife Ltd. (HLF, Financial).
Ultimately, there is little for value investors to learn from Singer’s strategies and tactics; they require too much capital, or their practices are too far removed from the traditions of Benjamin Graham and Warren Buffett (Trades, Portfolio).
Disclosure: I do not own shares in any of the companies listed in this article, and do not intend to buy any in the next 72 hours.
