BAUPOST'S KLARMAN: 'We will have to work harder with less to show for it'

Getty Images/ Kevork Djansezian

Baupost's Seth Klarman.

• Value investor Seth Klarman, founder of $30 billion hedge fund The Baupost Group, says good investment ideas are harder to come by.
• "Mispricings are less common and less stark, and expected returns are often at the low end of acceptability."
• Baupost generated returns in the mid-single digits last year.

Seth Klarman, founder of $30 billion hedge fund The Baupost Group, says it's harder than ever to find good investment ideas.

"For each idea, it seems like we have to dig deeper to figure outs something others have not, and there is growing competition for those insights," Klarman wrote in his year-end letter to investors, a copy of which was reviewed by Business Insider. "In general, mispricings are less common and less stark, and expected returns are often at the low end of acceptability."

Baupost gained in the mid-single digits in 2017. By comparison, stock markets rallied last year, with the S&P 500 gaining about 21%. Baupost had about 36% of its portfolio in cash at year-end, according to the letter.

Klarman said illiquid and private transactions have been particularly tricky. "Sellers have the upper hand and they know it, so urgent selling is rare and buyers are at a disadvantage as negotiations advance."

Still, Klarman remains hopeful (emphasis added):

"Although markets are increasingly expensive, diamonds in the rough are out there, and the only way to be successful in the markets when things get more interesresting is to relentlessly comb the markets and fill the idea pipeline. Years of increasing investor complacency inevitably sow the seeds of future dislocation and opportunity. But for now, we will have to work harder with less to show for it."

Baupost is staying away from bitcoin and the craze around other cryptocurrencies, meanwhile. "Cryptocurrencies seem more like tulip bulbs for the digital age," Klarman wrote.

The letter made no mention of the firm's Puerto Rico bond holdings, which have drawn controversy.