Interview with Hedge Fund Manager Peter Lupoff - Part 2

Last week, we posted an exclusive interview with hedge fund manager Peter Lupoff. We continue the interview with Peter in the second part of the interview. As a reminder, you can find more here about Peter's hedge fund Tiburon Holdings

Talk about a current investment idea that is particularly compelling

I’d rather not talk about a specific idea at the moment but would rather talk about themes. We get ideas three ways:

• A top down “thematic” approach. From this, we delve deeply for those trade ideas that can survive the five prong methodology (see part 1 of interview)
• The gritty work the phones, contacts, read the news, watch the markets for leads way – old school
• “Mining the Portfolio” for ideas – that is, the deep work on any one name necessitates looking at comps and events, and in doing this, we uncover other trade ideas.

Let’s talk about themes for a moment. They can be grand in scope, given industry or economic circumstances or extremely narrow, given very rational and predicable behaviors (Rational Actor’s Assessment).

One major theme we played from ’07-’08 was shorting regional and community banks in the top 5 foreclosure markets, trading at (then) 3.5X tangible book and with 80% of their loans in home mortgages, HELOC’s, commercial mortgages and raw land. We then threw out those banks that had assets that could create events that could hurt the trade, i.e., SunTrust’s interest in the Coke trademark, etc.

Going into Summer, 2008, with a complete drought in the capital markets, we ran a screen for companies with ’08-’09 maturities and significant revolving credit availability, hypothesizing the wholesale draw down of the revolver and satisfaction of the near term maturities. Oh yeah, and the freak out of the equity over this action as well. I don’t recall what order it came in, but Apollo did coercive exchanges in Harrah’s and Realogy. Was it not predictable that doing one, they’d come with the other?

The inflow of significant retail money to Loan and High Yield bond funds is not only impacting secondary market prices, but stoking new issue markets opportunities for companies facing near term covenant issues or maturities. As some paper cycles out of portfolios due to refinancing, these technically driven investors are, in some instances, structurally compelled to replace with secondary market purchases or new issues. Assuming we properly do the Rational Actor’s Assessment (again, as part of the Five Pronged Methodology), we should be able to determine what company’s bank facilities have a majority of CDO holders. In those instances you can pretty well count on amendments passing that extend maturities. In those circumstances where near term maturities are extended beyond and once longer dated bond, there is upside in that bond.

I’d like to tell you that there’s a thematic trade that makes sense simply shorting “overvalued” securities in this, now overheated market. I don’t disagree with my friends and colleagues that say “the fundamentals don’t support these valuations” etc, but we live in the here and now, operating in real markets with money to be made or lost daily. How different is the refrain of investors that are short today on fundamentals from the deep value types that were long last year.

Fundamentals will matter and that work is necessary and valuable, however it isn’t what is driving these markets at the moment. Without an outward looking component to your methodology (“Process, Legal and Technical”), you can miss this. I’d hate to be the manager explaining to investors how we’re right and the markets are wrong.

I mentioned what I learned from Marty Whitman, but here’s what I learned from Izzy Englander: as mentioned, I was short regional and community banks in the top five foreclosure markets with 80% of loans in resi and commercial mortgages and raw land, when, in 2Q08, every bank CEO, as if handed a script from Hank Paulson, recited on Quarterly calls, “We will not cut the dividend today, we will not raise new money today”. I gave up half my gains on that theme in a matter of days. I spoke to Izzy about it, explaining why I was right and he reminded me that “you may be, but we are not in the being right business, we are in the money management business, and those are two different things.” You are a fiduciary and have a covenantal bond with the investor and their capital. DO NOT LOSE MONEY. The fund is not a weapon to prove right or wrong. Why not try to be right every day, rather than “eventually”?

Any advice for those looking to get into the distressed debt investing field?

Be a student of the business. What I mean by that is read everything. Not research per se, read books on the relevant topics. Read the sell-side strategist’s materials. Talk to people that have been around. I have worked with some of the best known, best regarded, often perceived to be difficult people in this business. Actively covet dialog with such people.

Don’t be in a rush to do things before you have any real experience. Do what it takes to get real experience. No one has time to train in the traditional sense, so when you get yourself in the right place, be sure you have the base minimum requisite skills to do your job.

Check your ego at the door and don’t get defensive about disagreement. In the right organizations, that dynamism is how the best decisions are arrived at. You are doing your part.

Don’t believe you have a monopoly on brain power or perspective. Be open to the unique and odd places you might learn things that make you better at what you do and that can help you make money or avoid losses.

On trade ideas, know what you know, know what you don’t know and consider that there are things that you don’t know that you don’t know.

At this juncture in life, what motivates you?

My wife, Kelly and little boy Max are everything.

But as to work: I am at heart, a competitive person. I like team sports, played a lot of football and basketball as a kid. This business gives us an opportunity to constantly take on competition whether its beating an index, convincing an investor to make an allocation, or having conviction about our trade theses to make returns uncorrelated to our peers. Internally focused, I am constantly evaluating how to make more civil, professional and productive work environment.

Now that I have my own thing in Tiburon, I can tinker and build on this as long as I am able. That’s exciting to me. I stepped away from the business in 1998 for a short hiatus and when I came back, very few people were there to help, with the expansion of the business, no one knew who I was. I started from scratch more or less. Faced with that, I conceived the strategy for how I could make it work and executed.

Thank you Peter for the great content! Stay tuned in the coming weeks as we have lined up a few more interviews with players in the distressed debt world.