When – and how – hedge funds hide

IMG_3307In Iceland, nothing captures the island nation’s psyche more than Thingvellir National Park, a geologic wonder of steep cliffs above a valley where streams spill into a wide lake, all carved from shifting tectonic plates. Iceland’s first general assembly was established on this soil in 930; almost 1,000 years later, in 1928, the area was proclaimed a “protected national shrine of all Icelanders.” Today a visitor might encounter a wedding ceremony in its rift valley.

But Thingvellir is not just Iceland’s greatest national treasure. It’s also the name of a shell company created by a U.S. hedge fund for the sole purpose of buying the country’s defaulted bank debt shortly after the 2008 financial crisis — a crisis that brought Iceland to the brink of ruin.

Thingvellir Fund, incorporated in Delaware, and Thingvellir SARL, based in Luxembourg, were the onshore and offshore names of two of several secretive funds created by Seth Klarman’s $30 billion Baupost Group and named after famous Icelandic towns and landmarks that disguised a $3.7 billion Baupost investment

More recent events have revealed that Baupost’s use of shell companies isn’t unique to Iceland. The Boston-based hedge fund used a similar obfuscation strategy while investing in now-defaulted Puerto Rico debt. Through a series of shell companies — Decagon Holdings 1 through Decagon Holdings 10 — Baupost kept its holdings highly secret until last fall, The Puerto Rico revelation brought Baupost’s strategy to the forefront of a raging debate over the morality of such investments, with the hedge fund’s secrecy a truncheon used by the activists seeking debt relief.

Here’s my two-part Institutional Investor series that explores this issue in depth, looking at  Baupost in Iceland and Puerto Rico, and Paul Singer’s battles with both Peru and Argentina.








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