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Berkshire's Hiring of Hedge Fund Manager Creates Instant Leading Contender for Warren Buffett's Investment Role

Monday, 25 Oct 2010 | 6:36 PM ET
Warren Buffett
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Warren Buffett

Warren Buffett's Berkshire Hathaway revealed tonight (Monday) that Todd Combs, a 39-year-old hedge fund manager from Connecticut, will "soon be joining Berkshire as an investment manager."

That instantly launches the relatively unknown investor into the spotlight as a leading contender to eventually succeed Buffett as manager, or one of the managers, of Berkshire's vast portfolio.

He's not, however, the only candidate. In July, Charlie Munger told the Wall Street Journal that it was a "foregone conclusion" Chinese investor Li Lu would become one of Berkshire's top decision makers on investments.

In a news release, Buffett is quoted as saying, "For three years Charlie Munger and I have been looking for someone of Todd’s caliber to handle a significant portion of Berkshire’s investment portfolio. We are delighted that Todd will be joining us."

The release says Combs has been managing Castle Point Capital in Greenwich, Connecticut, for the past five years.

Fortune's Carol Loomis, Buffett's friend and editor of his annual letter to shareholders, writes tonight that Buffett met Combs through Munger, who thought Combs would fit in well at Berkshire.

Loomis reports:

Buffett described Combs as an "all-American type" who is not the least bit interested in publicity, an attitude unlikely to shield him from it. Now a resident of Darien, Conn., Combs is by birth a Floridian who graduated in 1993 from Florida State University with majors in finance and multinational business operations.

Buffett also tells Loomis that Combs' investment record during the financial crisis was "pretty good" and Loomis calls his hiring a clear indication Buffett is satisfied with Combs' performance.

According to Loomis, Combs will continue to work out of Connecticut and won't be moving to Omaha.

Combs' Castle Point is described as a long/short hedge fund that takes positions in financial services companies. It began full-scale investing in late 2007, the same year Buffett began his search.

Loomis says it would have "met immediate disaster" during the financial crisis if it had only gone long on financials, but was "apparently saved" by its short positions.

She also notes that Combs "ducked all the most famous disasters," by not going long on AIG, Lehman, Bear Stearns, Citigroup, Washington Mutual, Countrywide, Fannie Mae or Freddie Mac.

That, she writes, is consistent with Buffett's stated intention in his 2007 letterto hire someone who is "genetically programmed to recognize and avoid risk, including those never before encountered."

In its most recent 13-F filing with the SEC, Castle Point lists U.S. Bancorp ($22.8 million), Mastercard ($20.4 million), and State Street ($19.0 million) as its three largest long positions as of June 30. Berkshire also reports holding U.S. Bancorp stock. Its 69 million shares, as of June 30, would have a current market value of $1.6 billion.

It is important to note that today's announcement does not signal Combs will automatically become the "next" Warren Buffett and eventually run all of Berkshire Hathaway.

Buffett has said for some time now that when he's no longer running Berkshire, his duties will be split among a new CEO, who would oversee the operating businesses, and one or more investment chiefs.

Loomis notes that the hiring of Combs "at least partially satisfies" Buffett's 2007 planto "hire a younger man or woman with the potential to manage a very large portfolio, who we hope will succeed me as Berkshire’s chief investment officer when the need for someone to do that arises."

He noted at the time that "as part of the selection process, we may in fact take on several candidates."

Longtime Buffett-watcher Whitney Tilson says in an email tonight that given Berkshire's many "enormously successful" investments in financials, "and the likelihood that there will be more busts/panics in this sector over time (human nature never changes) – it makes sense to have a specialist in this area be one of the investment managers going forward."

Tilson speculates that with Li Lu concentrating on Asia and China, and Combs focused on financials, Berkshire could name another investment manager, perhaps with a background in consumer products and retail.

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Mastercard:

State Street:

For more Buffett Watch updates follow alexcrippen on Twitter.

Email comments to buffettwatch@cnbc.com

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