Omega Advisors

Omega Advisors Inc. was established by self-made billionaire and legend Leon Cooperman. In 1991, after working for Goldman Sachs for a quarter of a century, Mr. Cooperman launched Omega Advisors with self-financed seed money of $500 million. Today, he is the Chief Executive Officer of Omega Advisors and, along with partners, manages assets of roughly 5 billion dollars.

Mr. Cooperman started from humble beginnings. The son of a plumber who attended a public school and then worked his way into college (Hunter College, CUNY), he began his career by working as a quality control engineer for Xerox.

His break into the investment world came when he enrolled for an MBA from the Columbia School of Business, where he was promptly snatched by Goldman Sachs. After getting his MBA, Mr. Cooperman worked his way up at Goldman Sachs from initially performing investment research in the asset management department to later on becoming the general partner and chairman and CEO of Goldman Sachs Asset Management.

After twenty five years at Goldman Sachs, he retired from both positions, and in 1991 founded Omega Advisors in New York City, making it one of the biggest hedge funds then in the financial industry.

Mr. Cooperman’s learning experience, and eventual mastery, of financial minutiae from Goldman Sachs formed the basis of his new venture. Omega Advisors primarily invests in domestic public equity and dabbles in markets such as bonds and commodities.

When the fund is focusing on investing in value equities, it uses a combination of a top-down approach, to carefully choose the sector, and a long-short fundamental analysis. To create his portfolios, Mr. Cooperman takes a bottom-up approach to form his portfolios with the S&P 500 index as the benchmark. The strategies might seem deceptively facile but boast an eighteen year track record of 16% annual returns compared to S&P 500 index’s 10% and the fact that Mr. Cooperman has made the billionaires’ club.

However, for Mr. Cooperman money is not the sole and foremost motivating factor. The satisfaction derived from a job well done, and his commitment to it, far outweigh the financial gains. The fact that he sees something that nobody else does is what sets Mr. Cooperman apart: he goes as far as possible, even if that encompasses being an activist, to attain his vision. His commitment and involvement in his portfolios has given him a reputation of being vocal and ardent about the companies he owns.

Mr. Cooperman basically runs a value-oriented fund staunchly formed in his belief, forged over forty five years, that we make money in essentially five different ways, each playing a different role in any given year. And briefly, Mr. Cooperman’s “manifesto” or the five different ways to make money:

First, as stocks are a high -risk asset while short-term bonds and cash are low-risk assets, Mr. Cooperman expends a lot of time and energy in analyzing the stock market — studying the economy, the Fed, market valuation — to figure the direction of the market. With all this research and analysis intact, he tries to determine whether the market is undervalued or overvalued, and accordingly delineates Omega Advisors’ exposure to risk assets which is the first way to generate money. Based on such a valuation, for example, the firm is presently around 80% net long which is unconventionally high in the hedge fund industry.

Secondly, asset allocation is a great vehicle to make money. Mr. Cooperman considers asset allocation decisions more important than even stock selection. He explores the relative attractiveness of US stocks versus non-US stocks, high-grade bonds, high-yield bonds and government bonds — looking for, as Mr. Cooperman puts it, “the straw hat in winter”. In a nutshell, the investment strategy is seeking out mispriced asset classes which are being ignored by the market environment. Mr. Cooperman, in a recent interview considers US government bonds a mispriced (overvalued) asset class, however he shies away from shorting it as he believes the economy is still fragile.

Thirdly, Mr. Cooperman makes money by buying undervalued stocks, long side, which is his bread and butter investment strategy. Looking for growth at a fair price leads to more often than not in getting involved in takeovers; Mr. Cooperman’s specialty is event-driven investing. His eclectic, yet highly regarded, approach towards evaluating a company is based upon differentiating between the company’s public market value and its private market value.

Public market value is what an investor would pay for a minority position in a company as opposed to private market value which is what a financial or strategic investor would pay for control of the company. The former is precise, published in the daily press, but undulating and volatile, the latter relatively stable but imprecise, at best estimable.

So, Mr. Cooperman sifts through companies in the public market looking for ones that are selling at a discount to their private market value and evaluates potential catalysts for change. These undervalued stocks are then bought for the long haul. Mr. Cooperman also shorts overvalued stocks, this being his fourth way of making money, but with some hesitation as this strategy, historically, has not been his strong suit.

And finally, Mr. Cooperman indulges a small percentage of Omega Advisors capital to make macro trades and since macro is non-equity, the strategy could be long or short fixed income depending on the trade. Presently, Omega Advisors has 3% of its capital in gold.

QUOTES

“I was the first generation in my family to go to college, as my parents were immigrants to America. I have proved that with an average IQ, lots of drive and ambition coupled with a heavy dose of good luck, a lot can be accomplished. There is something to that expression, the harder I work, the luckier I get”

“In the investment world Warren Buffett is everyone’s hero, and mine too.”

“You have got to experience setbacks. A few years after I’d started by own hedge fund, I had a terrible year. I was down 23% in 1994. I had to work hard, persevere, move ahead. By the next year I was back up 30%.”