Few things are as misunderstood as Apple's $203 billion cash hoard, first and foremost because of this amount $168 billion is not cash at all but actual securities: treasuries, investment grade bonds, perhaps stocks and junk, something Zero Hedge first made quite clear back in 2012 when we presented "The World's Biggest Hedge Fund You Have Never Heard Of" - Braeburn Capital, Apple's asset management corporation, tasked with preserving (and enhancing) the value of Apple's biggest asset: its "cash equivalents" which are anything but cash.
As the following chart shows, with $203 billion in investable dry powder which is probably the best way of calling AAPL's cash and investments...
... the Cupertino-based company is more than $30 billion larger than what is generally accepted to be the largest hedge fund in the world, Ray Dalio's Bridgewater, which however "only" managed some $171 billion as of May 2015.
Following our report, many tried to cover up the fact that nobody really knows what is on Braeburn's books, punting to the general explanation: "it is all invested in ultra-safe securities." Other said "It says it only invests in “highly rated securities”—think government bonds from rich, stable countries, and debt issued by companies with very solid finances. The overarching objective is “minimizing the potential risk of principal loss,” which means it’s safe to assume that Apple is not operating a secret investment casino in the Nevada desert."
Only that is not exactly true.
AAPL's gargantuan securities hoard, and the fact that the company is no longer a maker of gadgets as much as a massive hedge fund, was noticed two months ago by Bloomberg who wrote that "Apple Is the New Pimco, and Tim Cook Is the New King of Bonds." This is what BBG said:
Apple Inc., Oracle Corp. and the other tech giants hoarding half a trillion dollars in cash have joined the ranks of the biggest buyers of the debt, often snapping up as much as half of some bond issues, according to five people with knowledge of the transactions.Apple, which had $193.5 billion of cash and marketable securities as of March 28, is now one of the biggest buyers of shorter-term debt sold by investment grade companies, often taking as much as $200 million of a $1 billion issue, according to four people with knowledge of the deals.I am sure asset managers like Vanguard and Pimco would prefer Apple call them and have them manage the money rather than competing with them,” said Kevin McPartland, the head of research for market structure and technology at research firm Greenwich Associates in Stamford, Connecticut.
Of course they would: just think of the asset management fees that are not being paid.
But that is precisely why AAPL is now also the world's biggest hedge fund: with an "AUM" of over $200 billion, it would much rather do its asset-management decisions in house, and specifically in this house.
Or actually, that was the house located at 730 Sandhill Road in Reno, Nevada where Braeburn was housed as Zero Hedge first revealed, until shortly after our report when it decided to disappear. Cue Apple Insider from March 2013:
... the office at that address is now in use by another firm (Randstad finance and accounting). Asked about Braeburn, the receptionist told AppleInsider that she only knew that the firm is no longer operating at that location and that she didn't know where it had relocated. A search of Apple's record filings did not turn up a new address.Apple doesn't appear keen on publicizing the address of its Reno operations ; neither Siri nor Maps offer any help in locating the Braeburn offices the way they do direct users to Apple's stores (including the one located in Reno) and its main headquarters facilities in Cupertino.
Actually that's not true. A 2 minute search reveals that Braeburn moved just down the road to a more impressive looking location at 6900 S. McCarran Blvd, Suite 3020, in Reno.
Far from the "boring, staid" buyer of ultra-safe treasuries, what is notable is that slowly but surely AAPL has become a dominant force in the corporate bond market, and has migrated into far riskier (and potentially illiquid) assets: as noted above, "[Breaburn] is now one of the biggest buyers of shorter-term debt sold by investment grade companies, often taking as much as $200 million of a $1 billion issue, according to four people with knowledge of the deals."
Which leads us to the second point about AAPL's "cash" - 90% of it is held offshore: in the latest quarter $181 billion of AAPL's cash, or about 90%, was held abroad.
It is here that Braeburn comes in, because it is funds held by Apple's offshore subs that provide the funding for Braeburn. As BBG reported a month ago, "Apple... had $171.3 billion of its cash and marketable securities in foreign subsidiaries and “generally based in U.S. dollar-denominated holdings” as of March 28, according to a regulatory filing." Make hat $182 billion as of June 30.
And just like every massive hedge fund, which prefers to operate in the shadows, Braeburn gets its share of shadow suitors seeking their share of its funds:
“We treat them as we treat Fidelity or Vanguard or any other investor,” said Curt Zuber, treasurer of Sydney-based Westpac Banking Corp., which has issued $6.1 billion of U.S. dollar-denominated bonds in the financial year started Oct. 1 and a total of $22 billion since October 2012.All four of Australia’s biggest banks, heavily reliant on offshore debt markets, have sent representatives to Reno, Nevada, where Apple’s money-management unit, Braeburn Capital Inc., is based, according to people with knowledge of the trips. Oracle’s cash managers are also based in the city known for its casinos, where hotel rooms costing as little as $69 a night provide cheaper lodgings than banker stops in New York, Boston and Newport Beach, California, where Pimco is based.
The curious secrecy surrounding AAPL's asset manager once again raises the same flag we noted 3 years ago: just what does Braeburn hold, becuase while we would be happy to take Tim Cook's word, we would be happier if we could see some AAPL 13Fs. Recall from September 2012:
Braeburn has no reporting obligations: there is no Investment Advisor Public Disclosure (IAPD) entry on Braeburn for the logical reason that it is not an investment advisor: it merely manages an ungodly amount of cash for AAPL's millions of shareholders. There is also no SEC filing 13-F filing on Braeburn's holdings. As such, not confied by the limitations of being a "long-only", it is in its full right to hold any assets it feels like, up to and including CDS on housing, puts on Samsung, or Constant Maturity Swaps that pay if the 10 Year collapses. It just doesn't have to report any of them.Nobody knows: and that's the beauty of Braeburn. It is the world's largest hedge fund that is not really a hedge fund, nobody has heard of, and nobody knows just what assets it holds.
Another reason why some may want to know just what debt AAPL is buying: in a bond market as illiquid as the one right now, should AAPL be forced to dump any of its billions in TSYs, IG, Junk paper (say because rates are rising) just what will happen to the market price in what is generally quite a bidless market?
Recall that the only reason why Bill Gross' departure and subsequent surge in redemptions from Pimco's Total Return Fund did not roil the market - as so many expected - is because as we learned laer, PIMCO sold from itself... to itself.
Which leads us to another question: just what is the fair value of AAPL's "cash" if and when the company is actually converting it to real cash, and/or the bond market locks up due to the creeping wave of illiquidity, as so many increasingly fear.
And why is all this taking place in Reno, NV instead of Park Avenue or Wall Street? Because as we reported three years ago, Apple "uses Braeburn primarily in its capacity to find legal tax loophole all around the world and avoid paying taxes" and Nevada is perhaps the best state in the US where one can do just that.
Which also brings us to a tangential point: with only $22 billion cash held domestically, at a run rate of $10 billion in quarterly stock buybacks, AAPL will have no choice but to issue anywhere between $10 and $15 billion in bonds in the coming weeks since the company appears to enjoy a floor of about $20 billion in cash held domestically. All of this will continue at least until such time as the US allows corporations to repatriate the hundreds of billions held offshore without suffering a tax hit.
Perhaps the only question is whether AAPL's asset management unit will buy the bonds issued by AAPL's operating company used to repurchase the shares of AAPL's shareholders.
Until then: sorry Bridgewater, but you are still not hedge fund #1.