Billionaires Portfolio: Yesterday, Idenix Pharmaceuticals Inc (NASDAQ:IDIX) was acquired by Merck & Co., Inc. (NYSE:MRK) for a 229% premium. That’s one of the biggest one day moves ever for a stock listed on the New York Stock Exchange. Billionaire and top hedge fund manager, Seth Klarman of the Baupost Group, made over $1 billion on his investment in Idenix, in one day.
How did he do it?
Klarman owned 35.4% of Idenix (almost 54 million shares). He paid around $300 million for his original stake, which is now worth $1.3 billion.
It’s very common in the hedge fund world for investors, like Klarman, to take such large positions in a single company. They spend a lot of money on talent and research, sometimes tens of millions of dollars, in an effort to uncover the investment opportunities that offer the potential to make multiples on their investment. When they find good candidates, like Idenix, they tend to bet big.
These investors tend to focus exclusively on stocks with asymmetrical risk-return profiles. This means stocks with huge upside potential but little downside risk. Holding a portfolio of stocks with these characteristics increases your odds of taking part in the big winners. It’s focusing on this concept of asymmetrical investing that has allowed billionaire hedge fund managers like David Tepper and John Paulson to put up 200%, even 500% returns in one year.
When you have a stock (or any investment) that has big upside potential with limited downside, you get an implicit call option. It behaves like a call option, but better. Of course the downside of options is that the value of your investment erodes over time. And, with options, you have a drop-dead date, the option’s expiration date. So with an option, you can be right on the idea, but wrong on the timing and lose all of your money. When you invest in a stock that has that same potential to produce multiples, you get the upside profile of the option, but without the drop-dead date (i.e. you don’t have to be right on the timing).
Moreover, when you do so, with the added kicker of having a billionaire investor involved, normally one with a controlling stake in the company that is working activity to unlock value in the stock, your chances of success go up dramatically. These big investors mean you have a partner on your side. And when they win, they tend to win big.
Please don’t miss the opportunity to learn more about me and how we follow Billionaire Investors into stocks by visiting the Billionaires Portfolio.
The insider behind the Billionaire’s Portfolio is William Meade. William started his career with Wood Asset Management. Wood Asset Management was a $1.5 billion dollar institutional asset management firm and hedge fund, founded by Gary Wood, a former Goldman Sachs Partner and Harvard MBA. At Wood, William helped manage equity and fixed income portfolios for major university endowments, Fortune 500 pension funds and super high net worth clients (including 2 billionaire families).
Next, William was Director of ETF and Mutual Fund Research for Zacks Investment Research in Chicago. At Zacks, he worked with the founder Len Zacks, a PHD from MIT, in developing and maintaining a proprietary model that ranked over 20,000 ETFs and mutual funds. This model was viewed and used by over 150,000 people monthly, and was published in US News and World Report, and featured on CNN, Yahoo Finance, and Fortune.com.
William received a Masters in Economics from Johns Hopkins University, including PhD level coursework in International Economics. At Johns Hopkins, Mr. Meade was taught by Economists from The Federal Reserve and Department of Treasury. While at Johns Hopkins Mr.Meade consulted for a top hedge fund in Washington DC.