Hedge fund Baupost Group found a way to turn California’s devastating wildfires into profits for investors.
After betting on insurance claims against Californian utility giant Pacific Gas and Electric (PG&E), Baupost received more than $3 billion in July, Bloomberg reported on Friday.
PG&E’s equipment has been linked to fires including the deadliest and most destructive wildfire in California history — the Camp Fire of 2018. The utility has agreed to a $13.5 billion settlement with victims of wildfires in the state.
Since Aug. 15, seven people have died in California wildfires, more than 100,000 have been displaced and 1.2 million acres have burned. The fires of 2017 and 2018 claimed more than 100 lives.
Billionaire investor and author Seth “The Oracle of Boston” Klarman manages the Baupost Group hedge fund. Founded in 1982 with initial capital of $27 million, Baupost is now one of the largest hedge funds in the world. Klarman wrote the book “Margin of Safety” published in 1991.
The payout was Baupost’s biggest profit generator in July and represented a large markup from what the firm had anticipated, the fund told investors Thursday. The fund bought $6.8 billion of subrogation claims against PG&E, court documents show, according to Bloomberg.
Insurers sell subrogation claims to investors at a discount because they know they’ll get paid right away. In the process, insurers lose the right to sue to recuperate damages endured by policyholders.
During the second-quarter coronavirus lockdowns, Klarman was reducing his exposure after the stock market bottomed out on March 23.
“The coronavirus pandemic caught several old school value investors like Warren Buffett, Stan Druckenmiller, and Klarman flat-footed,” Insider Monkey reported. “Their brains couldn’t function in a market environment where high growth tech stocks are flourishing and value stocks languishing as the Federal Reserve (invented) new ways of manipulating the equity and bond markets.”
As a result, in the second quarter, Klarman completely sold out of Cheniere Energy (LNG), Energy Transfer Equity (ET), XPO Logistics (XPO), Spirit Aerosystems (SPR), and Cars.com (CARS).
Baupost acquired some of the PG&E claims at about 35 cents on the dollar, Bloomberg reported, so its profit on the trade could have been close to $1 billion. But the gains were partly offset by losses on the firm’s equity holdings in the utility company, a source said.
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PG&E went into bankruptcy in January 2019 facing massive liabilities from fires blamed on its equipment that burned Northern California in 2017 and 2018.
The utility, insurers and claims holders including Baupost reached a deal in September 2019 that would bring the investors $11 billion in cash, as approved by a federal judge. A spokesman for fire victims said at the time that the arrangement was a blatant move by the utility and insurers “to help wealthy hedge funds and Wall Street.”
Fire victims across California and other parts of the U.S. continue to suffer the impacts of increasingly destructive wildfires, yet hedge funds profit from these calamities, critics say.
It’s a case of Wall Street firms perfecting their lucrative approach to disaster management, Common Dreams reported.
“What stage of capitalism is this?” Journalist David Sirota tweeted.
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