[Archives] Seth Klarman's Baupost Fund Semi-Annual Report 1999VW Staff
Seth Klarman's Baupost Fund Semi-Annual Report April 30, 1999
THE BAUPOST FUND
APRIL 30, 1999
This report and the financial statements contained herein are submitted for the general information of the shareholders of The Baupost Fund. The report is not authorized for distribution to prospective investors in The Baupost Fund unless preceded or accompanied by the current prospectus.
THE BAUPOST FUND
APRIL 30, 1999
THE BAUPOST FUND
44 BRATTLE STREET, 5TH FLOOR
P.O. BOX 381288
CAMBRIDGE, MASSACHUSETTS 02238
TEL. (617) 497-6680
FAX (617) 868-3529
June 24, 1999
Dear Fund Shareholder,
We are pleased to report a gain of 8.62% for the six months ended April 30, 1999. While less than the gains recorded by the broad market indices, the profit for the latest six months meets our ongoing objective of positive returns delivered with limited downside risk.
The broad market indices remain extremely expensive and have, despite a brief retreat by some of the highest multiple stocks, charged ahead to repeated record highs. The Dow Jones Industrial Average, for example, recently rose from under 9,200 to over 11,100 in less than three months. The U.S. economy remains robust (for now), and long term U.S. Treasury bond yields have climbed to over 6.0 % from 5.1% at the end of January. Most asset allocation models contrast bond yields to stock price-earnings multiples. At 6.0% bond yields, the S&P 500 Index is calculated by these models to be more than 30% overvalued. It would be far more overvalued were earnings to fall or interest rates to rise from current levels.
Unprecedented gains in large capitalization growth stocks continue to generate a mistaken faith among individual investors in the safety of owning stocks, as well as an erroneous impression of the potential future returns from equity ownership. Success begets additional success as investors project future results from the rear view mirror. One particularly irksome development is that fundamental research is today a significant impediment to good short-term results, as the most overvalued securities have steadily been the best performers and the most undervalued the worst. More and more, stocks are seen as apart from the businesses underlying them, with capital gains a product of investor money flows rather than corporate profit growth.
The Internet stock market bubble has been expanding at an accelerating rate. The shares of Internet companies have been rising 10%, 20% or more in a single day, splitting every month or two, and then quickly returning to their pre-split share prices. Dozens of nascent Internet companies are prominent on the IPO calendar and Internet stocks increasingly dominate cocktail party conversations as well as the daily stock market roundup. The $200 billion market capitalization of America Online recently exceeded that of IBM. Charles Schwab was recently valued 50% more highly than Merrill Lynch. Priceline, the Internet company that sells airline tickets, was valued more highly than the three largest airlines, combined! eToys came public and immediately jumped to a valuation well above that of the well established Toys "R" Us. The prevailing casino atmosphere must certainly put a damper on trips to Las Vegas or Atlantic City, where there are more losers than winners. In Internet-land, there have been no real losers as of yet; the illusion of a positive-sum casino is an attractive lure for the gambler. Recent exuberance notwithstanding, at today's valuations it is clear that Wall Street is certain to continue issuing shares of new Internet companies until the supply of shares overwhelms the resources of the buyers.
Simply put, we continue to face an unprecedented market environment with extreme volatility. In the face of very high prices, affordable and appropriate hedging is next to impossible. In our assessment, significant caution is called for at this time, and this is how we are positioned. While everyone else on Wall Street motors ahead at a frenetic pace, we are intentionally going slowly, unafraid of missing out on speculative gains and intent on protecting capital. This is an extremely challenging and dangerous environment, and we would rather be overly cautious and forego some profit than overly optimistic and potentially much poorer.
Baupost: The Current Market Environment
A recent Wall Street Journal article was headlined: For Some Stocks, Price Doesn't Matter. Within the article, the co-manager of the billion dollar Stein Roe Young Investor Fund described how he had revised his investment strategy to cope with today's environment: "To own a company like AOL (America Online), you had to throw out traditional measures of valuing companies. We had to say we have to own what we think is the dominant franchise in the Internet. It was a space that as a money manager you simply have to be in." Another manager similarly said, "It's almost like you have to own it." AOL recently sold for 388 times 1998 earnings and 238 times projected 1999 earnings.
This bubble is spilling over into the rest of the stock market, again at an increasing rate. Internet valuations make those on real companies, however overextended, seem reasonable, propelling those stocks even further into uncharted valuation territory. We believe there has been an extraordinary (and unknowing and probably temporary) increase in the risk tolerance of average investors. Specifically, what may happen in the future is today valued with unprecedented enthusiasm while what has already come into being (buildings, stores, traditional businesses) trades at subdued, even depressed prices.
Many of today's leading technology and telecommunications companies trade at 50 to 100 times earnings, or higher. While most of these companies are growing rapidly and possess extraordinary technology, these businesses remain highly competitive. Very low costs of capital and high returns attract enormous competition, and companies have to innovate faster and faster to stay ahead of the pack. Product life cycles are shorter and shorter, and unit prices continue to decline. We understand that the technology content of these companies is fabulous. Whether they are good businesses, deserving of astronomical multiples of current earnings, is an entirely different matter.
Students of financial history can point to historic levels of valuation to suggest that we are in a bubble. But students of psychology may be needed to complete the picture. For one thing, the financial markets have been so strong for so long that fear of market risk has mostly evaporated. People who used to hold bank certificates of deposit now maintain a portfolio of growth stocks. It is not really within human nature to comprehend that you may not know everything you think you know, and, further, that what you believe in could change on a dime. When your investments are backstopped by reasonably-priced tangible assets, the prospect of a change in sentiment is not very costly. If a building is no longer needed as a furniture retailer, maybe it would make a good warehouse. If you can't make money as a distributor, you can recover most of your capital by reselling your inventory.
Not so for dreams. With more and more of the market value of U.S. equities represented by lofty (in some cases infinite) multiples of current results, a change in sentiment could wipe out a large percentage of investor net worth. Sentiment, existing only in the minds of investors, is subject to change quickly and without notice. Perhaps today's dreams will become realities for some of the current Internet and technology favorites; and perhaps not. For many, the dream will be replaced by a nightmare. Then, the escalating bill for betting on dreams rather than on realities will have to be paid up.
Real value, of bricks and mortar, finished goods inventories, accounts receivable, operating factories and businesses, and even brand names, is hard, although far from impossible, to destroy. If you don't overpay for it, your downside is protected. If you purchase it at a discount, you have a real margin of safety.
Our Current Positioning
While the major stock market indices have never been so expensive, the range of valuation in today's markets is also extraordinarily wide. As a result, there are numerous undervalued small to medium capitalization stocks even as there are dozens of astonishingly overvalued large capitalization companies. Indeed, a vicious circle has been working against these smaller stocks (even as a virtuous circle propels the high flyers) in that their recent period of protracted underperformance causes disappointed holders to sell. This produces illiquidity and further declines, resulting in even greater underperformance which then triggers new waves of selling. Many small-cap value managers have been facing investor redemptions, further fueling the selloff.
We prefer to invest with a catalyst present to facilitate the partial or complete realization of underlying value. There is, however, significant competition for these sorts of opportunities from other investors, rendering many of them unattractive for investment; by contrast, uncatalyzed value situations today attract few buyers. Seemingly, it would make sense to increase our commitment to the deeply depressed uncatalyzed investments that are much more undervalued and where there is considerably less competition. Our concern is that we cannot know when the current love affair with large capitalization growth stocks will end, and what sort of havoc this will wreak on smaller stocks, however inexpensive. As we have explained before, the only logical way to hedge against this risk is to protect an investment in these undervalued smaller stocks with a put option on or short sale of more expensive stocks. We have ruled out short selling for a number of reasons, including the unlimited downside risk that short selling poses. With puts, at least, your cost is limited to the up-front premium. Such a hedge, however, is historically quite expensive and, as we learned last year, far from perfect.
Our resolution to this dilemma is to position the Fund's portfolio in three parts. A major component is cash (held in U.S. Treasury bills and/or in a U.S. Government securities money market fund), at around 42% of the Fund's portfolio at April 30. This asset is available to take advantage of bargains, but represents important dry powder until some of today's market extremes resolve themselves.
Another segment, about 25% of the Fund's portfolio, involves numerous public and private investments with catalysts for the partial or complete realization of underlying value. This includes corporate bankruptcies, restructurings and workouts, liquidations, breakups, asset sales and the like. These situations are generally purchased at expected annual returns of 15% to 20% or more. The success of these investments depends primarily on the outcome of each situation rather than on the level of the stock market. There can, however, be month by month fluctuations in the market prices of these positions.
At April 30, we held about 32% of the portfolio in deeply undervalued securities with no strong catalyst for value realization. Values in this portion of the portfolio are particularly compelling, with prices at discounts of 30% to 50% or more from our estimate of underlying asset values. A number of these positions are former spinoffs, ignored and abandoned in a market not oriented toward smaller companies. Most of these situations involve partial catalysts for value realization such as ongoing share repurchase programs and/or insider buying, but these limited catalysts offer only modest protection from the short-term volatility of the financial markets. This category represents the lion's share of our market exposure; this is generally the portion of the portfolio that we attempt to hedge. Frequently, but unpredictably, investments in this category develop a stronger catalyst and move to the previous category; indeed, the undervaluation itself often attracts such a catalyst. Less often, an investment from the previous category loses its catalyst and either moves into this category or is sold.
The balance of about 1% of the portfolio was held in market hedges and various other option exposures, which may or may not serve as hedges.
In recent weeks, we have been extremely active in a number of areas. The market-driven shift of our public equity portfolio back to the U.S. continues; we have taken advantage of several selling opportunities in Western European equities, while buying into several depressed U.S. stocks. We are actively researching dozens of others. We have also added to our position in the undervalued bonds of Loewen Corporation, which recently filed for bankruptcy. Table 1 below depicts the geographic or asset class breakdown of the Fund's portfolio at April 30.
Breakdown of Portfolio at 4/30/1999
Cash and Cash Equivalents 42.1%
U.S. Equities 31.0%
Western European Equities 7.7%
Emerging Market Investments 8.0%
Distressed Debt Investments 4.9%
Market Hedges 0.2%
Total Portfolio 100.0%
We are continuing to balance on the tightrope between investment opportunity and risk aversion, taking advantage of the most compelling opportunities while maintaining a very cautious posture in an environment where most securities are priced for perfection and then some. The preservation of your capital remains our foremost goal, and we are confident that our current portfolio will both protect and reliably enhance Fund capital.
Please contact us with any questions, comments or suggestions you may have.
Very truly yours,
AVERAGE ANNUAL TOTAL RETURNS (1) 1 5 LIFE OF FUND
For Periods Ended 4/30/1999 Year Year (since 12/14/90)
THE BAUPOST FUND -18.28% 10.14% 13.01%
Total return is an historical measure of past performance and is not intended to indicate future performance. Because investment return and principal value will fluctuate, the Fund's shares may be worth more or less than their original cost when redeemed. During some of the periods reported above, an expense cap was in place which had the effect of lowering the Fund's management fee and therefore enhanced the total return of the Fund.
GROWTH OF AN ASSUMED $50,000 INVESTMENT (1) IN THE BAUPOST FUND FROM 12/14/90 THROUGH 4/30/1999
[A LINE GRAPH APPEARS HERE, THE PLOT POINTS FOR WHICH APPEAR BELOW]
12/14/90 $50,000.00 $50,000.00
04/30/91 $58,158.98 $58,161.73
04/30/92 $63,692.31 $66,325.82
04/30/93 $75,761.04 $72,448.88
04/30/94 $85,933.03 $76,302.11
04/30/95 $92,875.27 $89,627.93
04/30/96 $105,059.48 $116,707.47
04/30/97 $131,063.27 $146,040.47
04/30/98 $170,436.34 $206,014.84
04/30/99 $139,277.38 $250,971.95
(1) Assumes reinvestment of all dividends.
THE BAUPOST FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1999
Investments in securities - at value $ 120,470,730
Foreign cash (cost $12,397) 12,394
Receivable for investments sold 1,241,237
Receivable for investments sold short 27,119
Interest and dividends receivable 353,214
Unrealized appreciation on
forward foreign currency contracts 202,593
Purchased interest 85,887
Other assets 50,202
Total Assets 132,849,353
Payable for investments purchased 2,210,314
Payable to The Baupost Group, L.L.C. 419,097
Other payables and accrued expenses 133,436
Payable for Fund shares redeemed 101,288
Payable for equity swap contracts 85,073
Payable for securities sold short 38,215
Total Liabilities 2,987,423
NET ASSETS $ 129,861,930
COMPOSITION OF NET ASSETS:
Paid in capital $ 135,486,509
Distributions in excess of net investment income (440,963)
Accumulated net realized gain on investments
and foreign currency transactions 1,895,624
Net unrealized depreciation on investments
and assets and liabilities in foreign currencies (7,079,240)
NET ASSETS $ 129,861,930
NET ASSET VALUE:
Offering and redemption price per share ($129,861,930/10,027,255) $ 12.95
THE BAUPOST FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1999
Interest $ 1,398,003
Dividends (net of foreign withholding taxes of $37,177) 471,029
Total Income 1,869,032
Investment management fee 664,738
Administrative fee 166,185
Custodian fees 49,224
Equity swap contract interest expense 48,338
Legal fees 39,652
Registration and filing fees 20,934
Investment expenses 20,559
Audit fees 19,980
Directors' fees 17,640
Transfer agent fees 14,580
Interest expense 8,957
Total Expenses 1,082,377
Waiver of investment management fee (7,417)
Total Expenses, Net 1,074,960
NET INVESTMENT INCOME 794,072
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) on:
Investments and equity swap contracts 5,357,900
Foreign currency transactions 1,574,330
Short sales (1,186,108)
Change in unrealized appreciation on:
Investments and equity swap contracts 3,863,763
Foreign currency transactions 99,971
Short sales 496,879
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 10,206,735
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 11,000,807
THE BAUPOST FUND
STATEMENT OF CHANGES IN NET ASSETS
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
APRIL 30, 1999
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
APRIL 30, 1999
THE BAUPOST FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
APRIL 30, 1999
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Baupost Fund (the "Fund") was established as a Massachusetts business trust under an Agreement and Declaration of Trust dated June 29, 1990, and is registered under the Investment Company Act of 1940, as amended, as a no-load, non-diversified, open-end management investment company.
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities. Actual results could differ from those estimates.
SECURITY VALUATION: Portfolio securities (other than certain foreign securities), options and futures contracts for which market quotations are available and which are traded on an exchange or on NASDAQ are valued at the last quoted sale price or, if there is no such reported sale that day, at the closing bid price. Securities, options and forward contracts traded in the over-the-counter market (other than those traded on NASDAQ) and other unlisted securities are valued at the most recent bid price as obtained from one or more dealers that make markets in the securities. Portfolio securities which are traded both in the over-the-counter market and on one or more stock exchanges are valued according to the broadest and most representative market. To the extent the Fund engages in "naked" short sales (i.e., it does not own the underlying security or a security convertible into the underlying security without the payment of any further consideration), the Fund will value such short position as described above, except that the valuation, where necessary, will be based on the ask price instead of the bid price. Securities traded in foreign markets are valued at their current market value, which, depending on local custom, may or may not be the last quoted sale price (or the closing bid price).
Assets for which no quotations are readily available are valued at fair value as determined in good faith in accordance with procedures adopted by the Trustees of the Fund. Determination of fair value is based upon such factors as are deemed relevant under the circumstances, including the financial condition and operating results of the issuer, recent third-party transactions (actual or proposed) relating to such securities and, in some cases, the liquidation value of the issuer.
Certain investments held by the Fund are restricted as to public sale in accordance with the Securities Act of 1933. Whenever possible, such assets are valued based on bid prices obtained from reputable brokers or market makers as of the valuation date. For assets not priced by brokers or market makers, fair value is determined by The Baupost Group, L.L.C. ("Baupost") in accordance with procedures adopted by the Trustees of the Fund.
FOREIGN CURRENCY TRANSLATION: The value of foreign securities is translated into U.S. dollars at the rate of exchange on the valuation date. Purchases and sales of foreign securities, as well as income and expenses relating to such securities, are translated into U.S. dollars at the exchange rate on the dates of the transactions. For financial statement purposes, gains and losses attributable to foreign currency exchange rates on sales of securities are recorded as net realized gains and losses, and gains and losses attributable to foreign exchange rate movements on income and expenses are recorded as foreign currency transaction gains and losses. The portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign exchange rates is not separately disclosed.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are recorded on the trade date. Gains and losses on securities sold are determined using the specific identification method. Dividend income is recorded on the ex-dividend date, except income on certain foreign dividends, where the ex-dividend date may have passed, is recorded as soon as the Fund becomes aware of the dividends. Interest income, including original issue discount, where applicable, is recorded on an accrual basis, except for bonds in default for which there is some concern as to whether interest will be received, in which case interest is recorded when received.
SECURITIES SOLD SHORT: The Fund engages in short-selling which obligates the Fund to replace the security borrowed by purchasing the security at the then current market value. The Fund would incur a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund would realize a gain if the price of the security declines between those dates. Until the Fund replaces the borrowed security, the Fund maintains daily, in a segregated account with its custodian, cash or securities sufficient to cover its short exposure.
FORWARD FOREIGN CURRENCY CONTRACTS: The Fund may enter into forward foreign currency contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Losses may arise from changes in the value of a foreign currency relative to the U.S. dollar or from the potential inability of the counterparties to meet the terms of their contracts. The Fund uses forward foreign currency contracts to hedge the risks associated with holding securities denominated in foreign currencies. The forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency, and any gains or losses are recorded as unrealized until the contract settlement date. On contract settlement date, the gains or losses are recorded as realized gains or losses on foreign currency transactions.
FUTURES CONTRACTS: The Fund may enter into index futures contracts for non-hedging purposes and in order to hedge against the effects of fluctuations in market conditions. The potential risk to the Fund is that the change in value of the futures contracts may not correspond to the change in value of the securities held by the Fund in those markets. In addition, for non-listed futures contracts, losses may arise if there is an illiquid secondary market for the contracts or if the counterparty to the contracts is unable to perform. At the time the Fund enters into a futures contract, it is required to deposit with its broker cash or U.S. government securities as collateral, calculated on a per contract basis. Subsequent payments to and from the broker are made on a daily basis as the market price of the futures contract fluctuates. Daily adjustments arising from this "mark to market" are recorded by the Fund as unrealized gains or losses. When the contracts are closed, the Fund recognizes a gain or loss. At April 30, 1999, the Fund had no open positions in futures contracts.
EQUITY SWAP CONTRACTS: The Fund has entered into equity swap contracts to gain exposure to specific foreign equities. A swap is an agreement that obligates two parties to exchange a series of cash flows at specified intervals based upon or calculated by reference to changes in specified security prices or interest rates. The payment flows are usually netted against each other, with the difference being paid by one party to the other. At the time the Fund enters into an equity swap contract, it may be required to deposit collateral, cash or Treasury bills with its broker.
Risks may arise as a result of the failure of another party to the swap contract to comply with the terms of the swap contract. The loss incurred by the failure of a counterparty is generally limited to the net payment to be received by the Fund and/or the termination value at the end of the contract. The loss incurred by the failure of a counterparty could include the collateral, in certain circumstances, if there is no required segregation of cash collateral from other assets. Therefore, the Fund considers the creditworthiness of each counterparty to a swap contract in evaluating potential credit risk. Additionally, risks may arise from unanticipated movements in interest rates or in the value of the underlying equities.
The Fund records a net receivable or payable for the amount expected to be received or paid under the contract. The interest component of the equity swap contract is recorded as swap interest income or expense. The fluctuation in the market value of the underlying security is recorded as unrealized appreciation or depreciation on investments. When the contracts are closed, the Fund recognizes a gain or loss. Premium payments made to enter into a swap contract, if any, are capitalized and amortized over the life of the swap contract. At April 30, 1999, the Fund had one outstanding equity swap contract with the following terms:
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with institutions that Baupost has determined are creditworthy. Each repurchase agreement is recorded at cost. The Fund requires that the securities purchased in a repurchase transaction be transferred to the custodian in a manner sufficient to enable the Fund to obtain those securities in the event of a default under the repurchase agreement. The Fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than the amounts owed to the Fund under each such repurchase agreement.
OPTIONS: The Fund may either write or purchase call and put options for both hedging and non-hedging activities. The risk associated with purchasing an option is that the Fund pays a premium whether or not the option is exercised. Also, for non-listed options, the Fund bears the risk of loss of premium and market value should the counterparty not perform under the contract. The Fund's exposure to market risk relating to the securities is affected by a number of factors including the size and composition of the options held, the time period during which the options may be exercised, the volatility of the underlying security or index and the relationship between the current market price of the underlying security or index and the strike or exercise price of the option.
FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund is a regulated investment company, as defined under Subchapter M of the Internal Revenue Code (the Code). By complying with Code provisions, the Fund is not subject to federal income tax provided that substantially all of its taxable income is distributed to shareholders. Therefore, no provision has been made for federal income taxes.
The Fund's income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to different treatment for certain of the Fund's foreign securities. Differences in the recognition or classification of income between the financial statements and tax earnings and profits, which result in temporary overdistributions for financial statement purposes, are classified as distributions in excess of net investment income or accumulated net realized gains. For federal income tax purposes, the Fund had a capital loss carryforward of $3,846,000 from tax year 1998. The carry forward may be applied against any net taxable realized gains of the current year and succeeding years until the earlier of its utilization or expiration on October 31, 2006. The Fund utilizes earnings and profits distributed to shareholders upon redemption of shares as a part of the dividends paid deduction for income tax purposes.
NOTE B - INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term investments) for the period ended April 30, 1999 aggregated $45,331,000 and $58,470,000, respectively.
For federal income tax purposes, the identified cost of investments at April 30, 1999 was $128,267,314. Unrealized appreciation/(depreciation), on a federal income tax basis, for all securities was as follows:
Six Months Ended
April 30, 1999
Gross unrealized appreciation $11,510,380
Gross unrealized depreciation (19,306,964)
Net unrealized depreciation ($ 7,796,584)
NOTE C - RESTRICTED SECURITIES
At April 30, 1999, the Fund held the following securities which are restricted
as to public sale in accordance with the Securities Act of 1933:
The Fund does not have the right to demand that such securities be registered.
The Fund does not anticipate any significant costs associated with the disposition of these securities.
NOTE D - INVESTMENT MANAGEMENT CONTRACT AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund retains Baupost as its investment adviser and administrator. Certain individuals who are officers and trustees of the Fund are also officers, directors and members of Baupost.
The Fund pays Baupost a quarterly management fee at an annual rate of 1.0% of average net assets of the Fund, and an administrative fee at an annual rate of 0.25% of average net assets of the Fund to serve as investment adviser and administrator. Baupost has agreed with the Fund to reduce its management fee by up to 0.75% of the Fund's average net assets until further notice to the extent that the Fund's total annual expenses (including the management fee, administrative fee and certain other expenses, but excluding brokerage commissions, transfer taxes, interest and expenses relating to preserving the value of the Fund's investments) would otherwise exceed 1.5% of the Fund's average net assets. For the purpose of determining the applicable management and administrative fees, average net assets is determined by taking an average of the determination of such net asset values during each quarter at the close of business on the last business day of each month during such quarter before any month-end share purchases or redemptions.
NOTE E - YEAR 2000 (UNAUDITED)
Management has assessed all computer systems used by the Fund, including the computer systems of its major service providers, in anticipation of issues that may arise on or after January 1, 2000. Like other investment companies and business organizations around the world, the Fund could be adversely affected if these computer systems cannot properly process and calculate date-related information and data from and after January 1, 2000.
Management is taking steps that it believes are reasonable to address the Year 2000 issue with respect to its internal computer systems and is obtaining satisfactory assurances that comparable steps are being taken by its brokers and other major service providers. At this time, however, there can be no assurance that these steps will be sufficient to avoid any material adverse effect on the Fund's operations. Management will continue to monitor the status of and its exposure to this issue. As of April 30, 1999, the Fund has not incurred significant Year 2000 related epenses, nor does it expect to do so in the future. Management is in the process of establishing a comprehensive contingency plan to address recovery from unavoided or unavoidable Year 2000 problems, if any.
THE BAUPOST FUND
FINANCIAL DATA SCHEDULE
6 This schedule contaons summary financial information extracted from the Baupost Fund's financial statements at 04/30/99 and is qualified in its entirety by reference to such financial statements.