Quanta Capita Holdings is a reinsurance company that lost a lot of money from Hurrican Katrina and the flooding of New Orleans. It is now in run-off mode, which means it is not writing new policies and is in the process of fulfilling current debts.

Preferred shares of Quanta (QNTAP) will be paid off before common stockholders, so it stands to reason that they are in better health than the common stock. One investor, who is mentioned in the story I’ve linked to, is buying the preferred stock while shorting the common stock.

Seth Klarman’s Baupost Group hedge fund owned 6.6 million shares of Quanta common stock (QNTA) as of June 30. He obviously believes that Quanta will have more than enough money to pay off both preferred and common shareholders. Because the common stock is already priced for the risk that it will not get paid off after the run-off, this position would make Baupost Group a lot of money if Klarman’s right, but if he’s wrong the hedge fund will likely lose nearly all the value it holds Quanta at this time.

It’ll be interesting to see if this strategy works out for Klarman and Baupost.

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