Billionaire hedge fund manager Seth Klarman defended value investing, saying in a letter to clients that several factors, including the proliferation of passive investing, have created market mispricings that will soon lead to a payoff for the long underperforming strategy.

Klarman, CEO of the Baupost Group, said his fund posted gains in the high single digits last year, which was well below the returns of the broader stock market. He said his fund was active late in the year, pulling out of investments that had reached their perceived value and ending December with cash accounting for 31% of holdings.

"We believe that ongoing selling pressure of value names has contributed to mispricings that represent potential opportunity for long-term investors," Klarman said in the letter, according to a copy obtained by CNBC.

The idea of value investing — focused on fundamental analysis of companies that often lack rapid growth but have steady and projectable cash flows — has long been championed by legendary investors such as Warren Buffett and Benjamin Graham.

Klarman is widely seen as following in the footsteps of those men, often being called "the next Warren Buffett" or "the Oracle of Boston," a riff on a common nickname for Buffett. Used copies of his 1991 book "Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor," sell for hundreds of dollars online. His fund has about $30 billion in assets under management.

Value investing has not been a winning strategy from a macro perspective for more than a decade. The Russell 1000 Value Index has underperformed the Russell 1000 Growth Index by 4.4 percentage points annually since 2007, and that gap has widened recently.