Seth Klarman Outfoxes Wildfires with Canny Insurance Bet on Utility

Billionaire hedge fund operator offsets equity stake in woebegone PG&E with purchase of liability claims against it.

Now we know how it looks when hedge funds successfully play the ends against the middle. Check out billionaire Seth Klarman’s canny move to cover his misbegotten flier on PG&E.

This comes as the California utility announced Monday that it will file for bankruptcy protection due to its admitted responsibility for the most destructive wildfire in state history last fall.

Klarman’s hedge fund, Baupost Group, loaded up on 14.5 million of PG&E shares in the third quarter, before the fires started in November. His stake was worth just under $900 million at the end of September.

Worth about $49 per share in early November, before the wildfire ignited, PG&E’s stock traded at just above $8 at Monday’s close. That implies that Klarman’s stake has plunged in price by about 83%. What’s unclear, though, is if he sold any of his stock holdings since then.

Cleverly, Klarman has hedged his equity bet on PG&E by buying $1 billion in insurance claims against the power company, according to Bloomberg News. Baupost specializes in this esoteric field, known as subrogation. The hedge fund bought the claims for up to 35 cents on the dollar, Bloomberg reported. The claims were in connection with previous wildfires, in 2017.

As the state’s largest utility declared its plans to file for Chapter 11, PG&E faces billions of dollars in potential liability. That’s as a result of the fires, many of them started by the company’s equipment amid a drought that left woodlands extremely flammable.

Baupost recently reported that it was up 2.8% for the year through November. That’s a good bit better than its peers—global hedge funds lost 0.1% for the period, Hedge Fund Research found. Baupost benefited from its large equity position in Twenty-First Century Fox, which surged in price after the entertainment firm’s deal with Walt Disney.

The hedge fund could not be reached for comment.

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