Heebner Hedge Fund Targets $5 Billion With Lure of Top Returns

Date: Thursday, September 11, 2008
Author: Miles Weiss, Bloomberg

Kenneth Heebner, manager of the top-ranked U.S. stock mutual fund, is seeking as much as $5 billion for his first hedge fund.

Heebner, who has worked in the mutual-fund business almost four decades, formed a private investment partnership in June called Wayfarer Capital LP, according to Aug. 14 regulatory filings. The size of the fund, which had raised $73 million from wealthy investors and institutions, may vary from the target, Wayfarer Capital said in the filings.

A private fund would free Heebner from most regulatory oversight and allow him to buy or sell any assets, unlike mutual funds, which are more tightly controlled. Hedge funds also charge higher fees, including a cut of investment profits.

``He has wanted to do this for a long time,'' said Janine Hermsdorf, who retired in December as the head trader at Heebner's Boston-based Capital Growth Management LP after working with him for 27 years. ``This was just the time to go ahead.''

Martha McGuire, a spokeswoman for Capital Growth Management, declined to comment on the filings by Wayfarer Capital with the U.S. Securities and Exchange Commission and state regulators. Stephen McShea, an attorney in the Boston office of Dechert LLP, the law firm that helped set up the partnership, also declined to comment.

Heebner's CGM Focus Fund had the best performance among diversified U.S. stock mutual funds this year through June 30, gaining 17 percent including dividends, compared with the 12 percent decline by the Standard & Poor's 500 Index, according to data compiled by Chicago-based Morningstar Inc. The fund has since fallen 29 percent, while the benchmark index is off 3.9 percent, illustrating the swings that often accompany Heebner's approach to stock-picking.

Macro Style

The 67-year-old fund manager is known for making concentrated bets on the direction of market segments ranging from real estate to commodities. CGM Focus returned 80 percent last year after loading up on fertilizer, energy and mining stocks and betting against companies hurt by losses tied to subprime mortgages, including Countrywide Financial Corp. and Indymac Bancorp Inc. CGM Realty Fund, also run by Heebner, rose 34 percent.

His strategy of seeking to capitalize on broad economic trends, known as macro investing, is in demand among institutions. While hedge funds declined 4.83 percent on average this year through August, macro managers gained 2.57 percent, according to data compiled by Hedge Fund Research Inc. in Chicago.

``Global macro is really the area'' in which hedge-fund clients are adding money, said Jeff Joseph, managing partner for Chicago-based Prescient Advisors LLC, an adviser on alternative investments. ``Political uncertainty, inflation, credit dislocation are all things that play well for a manager with a broad mandate to pursue directional movements.''

Decade of Gains

CGM Focus, which oversees $8.1 billion, returned 27 percent a year during the past decade, virtually tied with the $603 million Turner Emerging Growth Fund, run by Frank Sustersic and William McVail, as the top U.S. diversified stock fund. The S&P 500 Index rose 4.5 percent in the same period, while hedge funds gained an average of 9.8 percent.

Heebner invested 64 percent of CGM Realty in homebuilder stocks prior to the real-estate bubble and then sold the shares in 2005, more than a year before the subprime-mortgage crisis began. The $2.3 billion fund climbed 24 percent a year in the past decade, the highest among real estate funds tracked by Morningstar.

Atypical Fund

Heebner's success -- Fortune magazine in May dubbed him ``America's hottest investor'' -- has brought an influx of cash. CGM Focus's assets more than tripled to $10.4 billion as of June 30 from $2.9 billion a year earlier.

Heebner runs CGM Focus differently from a typical mutual fund, often concentrating his holdings within several industries. He even has the leeway to invest as much as 70 percent of the fund in oil and gas stocks once energy companies in the S&P 500 equal 9 percent or more of the index's market value.

Another key to CGM Focus's returns are short sales, a trading technique that involves selling borrowed stock to profit when the shares decline.

CGM Focus, which had bets against about $2 billion of stocks at the end of June, was started by Heebner in 1997, the same year the U.S. Congress repealed a tax regulation limiting the amount of money a mutual fund could earn from short selling.

As a result of these techniques, CGM Focus's returns are marked by swings from gains to losses. According to Morningstar, the fund was twice as volatile as rivals during the past decade.

Why Pay More?

CGM Focus's volatility could be a sticking point for Heebner as he seeks investors for Wayfarer Capital, said Sandra Manzke, chief executive officer of Maxam Capital Management LLC, a Darien, Connecticut-based firm that selects hedge funds for clients.

Another potential problem is that CGM Focus offers access to Heebner's expertise at a lower cost and with fewer restrictions than a hedge fund.

``I love Ken's mutual fund,'' said Manzke, who worked with Heebner in the 1970s at Boston-based Scudder, Stevens & Clark Inc. and currently is an investor in two CGM funds. ``I don't know why someone would invest in his hedge fund'' when they can invest in CGM Focus at a potentially lower cost, she said.

Wayfarer Capital could boost the bottom line at Capital Growth Management, a former division of Loomis, Sayles & Co. that Heebner and his partner Robert Kemp set up as an independent firm in 1990.

Fees Soar

CGM Focus's fees equaled about 0.92 percent of assets under management in 2007, according to SEC filings. Hedge funds typically charge an annual base fee equaling 2 percent of assets. They also take 20 percent or more of investment gains.

Capital Growth Management's fees from CGM Focus were $31.1 million during the first six months of this year, almost equal to the $31.2 million earned during all of 2007.

``Obviously, he has had three or four years of very strong numbers,'' said Geoff Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island, referring to Heebner. ``Why not take advantage of it?''

To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net