Institutional Investor's Alpha Magazine - November 2007 - (Page 12)

cured financial backing and began running his own convertible-arbitrage hedge fund full-time. After successfully navigating 1987’s equity market crash, he built a solid track record and in the spring of 1988 asked his old Harvard classmate to join him. Roth relocated to New York, where Stark was based at the time, and began trading Japanese warrants. “The good news was Japanese warrants were so cheap, even a lawyer who didn’t know what he was doing could make money,” says Roth. In 1992 the pair parted ways with their original backers and launched Stark Investments in Greenwich. The next year they moved to Mequon, a small suburb of Milwaukee, and in 2002 the company was relocated to its current ofﬁce in St. Francis. Beﬁtting their experience at investing in distressed situations, they bought their headquarters building from Joy Global, the company that emerged from the bankruptcy of mining equipment manufacturer Harnischfeger Industries. Despite the difficult market for credit, Stark’s main fund was up 13 percent through September, outperform- ing the HFRI composite index, which was up 8.5 percent. Investments in Asia and a successful resolution to the disputed sale of San Diego, California–based non– subprime mortgage lender Accredited Home Lenders Holding Co. to Dallas-based private equity firm Lone Star Funds contributed to recent results. But not all of Stark’s investments have been blockbusters. In 2006 the hedge fund invested in a slate of high-proﬁle movies, including Poseidon, that failed miserably. Investors, however, say the deals had little impact on Stark’s returns. “They are very good at understanding the capital structure of a company,” says Michael Rosen, a principal and chief investment ofﬁcer of Santa Monica, California– based Angeles Investment Advisors. “In periods of stress they have always been well positioned to jump in at the appropriate time and ﬁnd ways to make money.” With default rates expected to rise and credit spreads likely to widen, the next few years should provide interesting opportunities for Stark. — Imogen Rose-Smith UPDATE Long-Only Hedge Funds T he rise in popularity of long-only hedge funds over the past few years has had many longtime hedge fund investors scratching their heads. But after researching the performance of some 50 such funds during the 2000–’02 bear market, one skeptic, James Jenkins, found that long-only managers could deliver positive returns in a declining market. “I was totally surprised that a collection of long-only funds could do so well in a bear market,” Jenkins told Alpha earlier this year (“The Long Riders,”June 2007). During the past few months, longonly hedge funds, and Jenkins’s newfound belief in them, have once again been put to the test, courtesy of the ongoing subprime mortgage market meltdown. This time around, however, the results have been mixed, concedes Jenkins, executive vice president of Esko, a Palm Beach, Florida–based family office and private investment company. “Small-cap guys got hammered,” he says. “But largecap guys did well.” Over the past three months or so, Jenkins says, managers that concentrated in stocks with large capitalizations have done quite well as long as they weren’t focused on companies in the ﬁnancial services or real estate–related sectors. For example, Stephen Mandel Jr.’s Lone Cascade racked up a 41 percent Esko’s James Jenkins return through the end of October (net of management fees but not performance fees); Wayne Cooperman’s Cobalt Partners was up roughly 12 percent. Jenkins is an investor in both Lone Cascade and Cobalt Partners. But many of the other long-only funds in his portfolio, like Abrams Bison Partners, have been focused on small-cap companies. Abrams Bison was down 1.5 percent during the same period. MFL Investments — one of Jenkins’s ﬁrst long-only funds, managed by Matthew Feshbach — got clobbered over the past three months. Feshbach would not confirm his fund’s performance, saying only, “It’s been rough.” Feshbach had been concentrated in just four small-cap companies, all of which suffered major losses — ranging from 33 percent for Monroe, Michigan–based furniture maker La-Z-Boy to 97 percent for Westmont, Illinois–based relocation company Sirva. Feshbach says the best performers among the long-only set were those who invested in large-cap, growth-oriented technology stocks. He adds that many managers who invested in value stocks in moretraditional industries, such as ESL Investments’ Edward Lampert, also took it on the chin. ESL saw three of its four holdings decline, including retailer Sears Holdings Corp., which accounts for nearly 70 percent of the firm’s stock portfolio. “If the best of the long-only managers was down, imagine what it was like,” says Feshbach. Jenkins, who no longer has money with Feshbach, is not about to write off the onetime short-selling star. “There is no doubt Matt [Feshbach] will rebound,” he says, adding that he is considering placing money with Feshbach’s fund again. Jenkins doesn’t think that the lousy performance of a handful of smallcap concentrated portfolios should be viewed as an overall reflection of the long-only strategy. “It’s a function of where the manager is playing,” he says. — S.T. 12 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2007 Photo by Brian Smith for Alpha

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - November 2007

Institutional Investor's Alpha Magazine - November 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Patriot State The Good Guys: College Connection Interview: Currency of Change Cover Story: Comeback Kid Strategies: Masters of Art Research Center: Alpha Awards: Top Technology Providers Top Analysts Alpha Bytes: Critical Choice Unhedged: Commentary: Banking on a Bubble

Institutional Investor's Alpha Magazine - November 2007

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