Tuesday, March 17, 2009

Marty Whitman Wishes He Had More Liquidity

Investopedia notes (Hat Tip: The Guru Five):

Value investor Marty Whitman, head of mutual fund firm Third Avenue Management, recently had this to say (along with Senior Research Analyst Ian Lapey) about the markets, "Third Avenue wishes it had more liquidity, because then management would have been heavy buyers of high-quality equity securities, which are now as cheap as either of us ever remember them being."

I'm sure Whitman's investors in his Third Avenue funds wish they had more liquidity too. Perhaps they would, if Whitman & Co. hadn't lost so much of their money last year. This raises a question about the role of risk management and hedging in open end mutual funds. Long-time value investors such as Marty Whitman may have the iron stomachs to handle what many value investors term "quotational losses" (or, as most other investors call them, "losses"). But one of the challenges of running an open end mutual fund is that investors with lower risk tolerances will invariably redeem their money while many of the fund's investments are down, forcing the fund manager to sell positions at a loss to meet those redemptions. Wouldn't it make sense to plan for this contingency by hedging, increasing cash levels in up years, or by some other means?

The photo above, of Whitman, comes frm this Fortune article: Five Funds for 2009.


G. Paltrow said...

Nobody expects the Spanish Inquisition.

... Monty Python

Daniel said...

Thanks for leaving me the note and giving the hat tip.

Your last two questions are good ones. Third Avenue actually had a decent amount of cash going into the downturn. Don't know about the flagship fund (for sure) but the small-cap fund was closed to new investors for some time as well.

In the end, not having cash isn't what hurt Third Avenue holders as much as being wrong in the short-term (which can mean simply being at odds with the market, though I won't vouch for every single stock he owns by any means).

Again, don't quote me on this, but I also think Whitman didn't keep much cash in US dollars (because he was bearish on the currency).

This was or is in my view a correct position, especially long-term, but over the short-term a lot of currencies have declined against the dollar as the deleveraging process has unwound.

That added to the pressure experienced by the fund to sell some holdings--along with most importantly the declines of some big and well-known positions.


By the way: a review on one of your favorite places to hangout (Guru Focus) was posted to the Guru 5 today.

DaveinHackensack said...

Interesting speculation about Whitman holding foreign currency.

Re GuruFocus, I was surprised to see your review. I thought you stopped going to the site some time ago. You ought to consider posting your review on GuruFocus itself. They'd probably appreciate the feedback. Could also generate some traffic for your blog.

Daniel said...

Thanks for the advice. I excerpted a large amount and put it on GF.

Though I'm not a regular, I still think it's a good site, with the exceptions mentioned in the review.

Was going to try and sneak a link this way in there--as an alternative to reading the Forum--but decided it wasn't proper for a review, and you don't need help with the traffic anyway. :-)

Caught a glimpse of something you wrote about Greenblatt on the way in and so am going to end this and go read that. Cheers,