Profiting from Hedge Funds: Winning Strategies for the Little Guy

Chapter 8

Seth Klarman

The prevailing view has been that the market will earn a high rate of return if the holding period is long enough, but entry point is what really matters.

—Seth Klarman

Seth Klarman is founder and president of Baupost Group, LLC, a hedge fund he founded in 1982.1 Baupost is among the largest hedge funds in the world, with almost $30 billion in assets under management (AUM).

Klarman was born in New York City but grew up in Baltimore; he had an obsession with numbers from childhood. From baseball statistics he graduated to stock tables and, by age ten, had already made his first stock purchase in Johnson & Johnson. While at Cornell, he was introduced to value investing via a summer internship at Mutual Shares, an investment firm founded in 1949 by Max Heine. Mutual Shares operates on the value-investing principles espoused by Benjamin Graham and, in 2010, was ranked as the best performing mutual fund over the last fifty years.2 Klarman has since admitted that what he learned there was far superior to what an academic setting could offer. Immediately upon graduation, he had another eighteen-month stint at Mutual Shares.

Professor William Poorvu recognized Klarman’s immense potential during a course on real estate at Harvard Business School. Soon thereafter, Poorvu and his friends enlisted Klarman’s help in investing their money. Thus, Baupost was formed from initial capital of $27 million. The fund earned annualized returns of ∼19% since inception compared to ...