Importance of cash holdings

Perhaps one of the most remarkable things (among many) of the Baupost track record is that it is routine for them to hold 30% to 50% in cash while they are looking for things to buy. To generate the types of returns they have for over three decades with a huge percentage of the portfolio in cash offers a strong challenge to the traditional mantra that portfolio managers should be fully invested at all times. When one of Klarman’s chief lieutenants retired last year, he discussed the use of cash in his farewell letter saying, “one of the most common misconceptions regarding Baupost is that most outsiders think we have generated good risk adjusted returns despite holding cash. Most insiders, on the other hand, believe we have generated those returns BECAUSE of that cash. Without that cash, it would be impossible to deploy capital when we enter a tide market and great opportunities become widespread.” In other words, cash has protective and option value, keeping portfolios safe during dislocations and providing liquidity to buy bargains with high margins of safety after the corrections occur.