May 18, 2010 / 5:05 PM / 9 years ago

Baupost may consider returning money to investors

* Move will be considered if cash increases - Klarman

* Firm currently has about 30 percent in cash

By Svea Herbst-Bayliss

BOSTON, May 18 (Reuters) - Legendary hedge fund manager Seth Klarman said he may consider returning money to investors if the amount of cash held by portfolios at his Baupost Group increases.

Klarman, whose average double-digit returns for more than two decades have made made him one of the hedge fund industry’s biggest stars, said the $22 billion fund currently has roughly one-third in cash.

“We are thinking about actually returning it if it got higher,” Klarman, who rarely speaks in public, said at the CFA Institute’s annual conference in Boston on Tuesday. “We are trying to walk a tightrope.”

In a wide-ranging talk, he said he sees few bargains in the current environment and forecast the stock market could suffer another lost decade without any gains.

While he may not be a born worrier, Klarman said he has long pondered the size of his fund and how effectively large pools of money can be invested.

“I’ve always thought that size was a negative,” he said, adding that bigger size often means investors become less nimble.

Klarman would not be the first to return money at a time when hedge funds are becoming more popular with investors because they often promise to outperform traditional investments during market turmoil.

For decades, Klarman’s fund has been largely off limits to new investors as he and his partners have carefully controlled the size of the firm. He started it in 1982 with $27 million and has averaged 20 percent annual gains ever since. In 2007, amid the depths of the credit crash, Baupost had its best year, gaining 52 percent.

But before the financial crisis hit markets, the firm opened up to new investors for the first time in years, Klarman said, deciding that more capital might be helpful to pursue certain investment opportunities. “We went to our wait list for the first time” in years, he recalled.

In hindsight, the move proved especially smart, as it would have been extremely difficult to raise new money at the height of the financial crisis, he added.

As the financial crisis sent markets tumbling in 2008, hedge fund investors pulled billions of dollars out of the $1.6 trillion industry.

Since launching his investment career after graduating from Harvard Business School in 1982, Klarman has focused exclusively on finding inexpensive out-of-favor stocks and bonds with room to grow. At the moment, one area Baupost is considering is private commercial real estate, Klarman said.

Throughout the fund’s history, Klarman said his managers have generally preferred to play it safe, hedging against unlikely but potentially catastrophic events.

Currently, he is worried about the prospect of rising prices and said his firm’s cautious outlook still prevails.

“We’d rather underperform a huge bull market than get clobbered in a bear market,” he said. (Reporting by Svea Herbst-Bayliss; editing by John Wallace)

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