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November 6, 2006 8:10 pm

James Altucher: Hiding in an age of transparency

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I’m flattered. You would be too if something you wrote was mentioned in a filing with the Securities and Exchange Commission by someone trying to prove his constitutional rights were violated. And particularly as those rights were allegedly violated by me (and others of my ilk) because of Rule 13(f)(2) in the SEC Act of 1934 (back when young bootlegger Joe Kennedy was writing the rules).

Let me back up. I got an e-mail from a friend of mine whose name I don’t know. He writes a blog, The Microcap Speculator, and has chosen to remain anonymous. Bloggers resemble superheroes in this respect. Microcap tells me: “You’re famous”. And he attaches the filing written up by Phil Goldstein, the general partner of Bulldog Investors, a hedge fund that primarily takes activist stances in publicly traded closed-end funds.

Phil last hit the headlines when he won a lawsuit against the SEC that allowed hedge funds not to have to go through the arduous registration process. Now he’s at it again, claiming that the SEC rule requiring him to file a 13F-HR filing once a quarter violates his constitutional rights. The 13F-HR filing is filed by any entity with more than $100m in assets, and involves disclosing all of their stock holdings. As Goldstein says, “The Fifth Amendment of the Constitution states: “[N]or shall private property be taken for public use without just compensation.” And then it states: “The Applicant’s equity holdings are trade secrets that are protected by the Taking Clause of the Fifth Amendment.”

To support his claim he quotes my worst-selling and most recent book, SuperCa$h. In particular, a chapter titled “Trade Like Jeff Berkowitz”.

Berkowitz was Jim Cramer’s right-hand man at Jim’s hedge fund and now runs the firm, which has been renamed J.L. Berkowitz & Co. Goldstein quotes my article at length but the main line is: “I like learning from the stock picks and styles of others... Along these lines, I like looking at the 13F-HR.” Snap! Guilty!

Goldstein’s missive is 19 pages. And my response to the various cases and examples he brings could fill just as many pages. But I do have three points to make:
■A hedge fund is often structured as a partnership in which the manager is the general partner and the investors are limited partners. As such, a hedge fund’s money, particularly when it is more than $100m, is not the private property of the manager, but rather the property of potentially hundreds of institutions, pension funds, endowments, and so on that together make up the partners of the fund. If I were a teacher in New York and the NY State Teachers Fund were an investor, then indirectly I am an investor and very concerned about the state of my investment in an otherwise illiquid vehicle with high fees and zero transparency.
■The only real tangible benefit of viewing a 13F-HR filing is the knowledge that 45 days earlier (the filing comes 45 days after the quarter’s end) the fund was not (or was) over-concentrated in any one set of positions. You also get to know if there was any style drift or if any of the statements the manager has made about his portfolio differ from what is revealed.
■Goldstein assumes we can make use of his picks to avoid doing serious research and simply piggyback his positions. However, for all we know, he is already out of those positions, or is scaling out of them (45 days is a long time), or he got in at much lower prices, or that his research is awful. Recent examples include James River Coal (accumulated by Pirate in the $40s, now in the $10s) or the fund manager BKF (accumulated by Steel in the $20s, now below $10). Hedge funds take nice compensation already for winning stock picks like these. I’m not sure we have to provide “just compensation” on top of that for taking a peek behind the sacred wall.

That all said, Goldstein’s latest 13D filings do contain some stocks worth looking at. Putnam Tax Free Health Care Fund (PMH) is trading at a 10 per cent discount to its net asset value and has a 5.8 per cent taxable equivalent dividend. Goldstein is trying to select trustees to help in his efforts to open up the fund (closing the discount to net asset value). Municipal Advantage Fund also trades at a 10 per cent discount to its net asset value and Goldstein is pushing management to merge the fund with another that is trading at a premium to its net asset value.

Goldstein’s strategy, which he has spoken about openly, is mostly to buy closed-end funds trading 10-15 per cent below their net asset value and try to get management to then take actions to close that discount. He’s the ultimate value investor. How does he know the net asset value of these closed-end funds? Well, of course, it’s because they are required to publicly disclose these holdings.

james@formulacapital.com

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