Hedge funds managers try, try again

Date: Wednesday, February 4, 2009
Author: The Deal.com

Plenty of hedge fund managers lost their shirts to 2008's bear market, but that doesn't appear to be keeping some of them from trying again with a new fund. The latest manager to go that route is Michael Zimmerman, whose Prentice Capital Management LP tumbled 88% last year.

According to Bloomberg, the new fund, the Prentice Capital Long/Short Equity Fund, will differ greatly from Prentice's current hedge fund. The new investment vehicle will trade retail and consumer stocks, whereas the current fund buys equities, corporate debt and specializes in closely held companies.

However, Zimmerman will have some company while out fundraising as many other fund managers are also seeking funds for new investing strategies after their hedge fund's worst year ever.

Nevertheless, the continuing bear market might not be the only hurdle for Zimmerman's fundraising efforts. With redemptions from his current fund halted since last year, the new Prentice fund will likely find its potential investor base has all its cash tied up in some hedge fund that tanked last year. - George White

Bloomberg Story:

Michael Zimmerman, who runs New York- based Prentice Capital Management LP, plans to start a hedge fund focused on retail and consumer stocks after his main fund halted redemptions and lost as much as 88 percent last year, according to marketing documents and investors.

The new Prentice Capital Long/Short Equity Fund would buy and sell only publicly traded stocks, according to the marketing documents. The firm’s flagship fund, Prentice Capital Partners, trades public stocks and corporate debt and has about a third of its assets in closely held companies.

“How can you raise money when you’ve destroyed capital to that degree?” said Brad Balter, whose Boston-based Balter Capital Management LLC invests in hedge funds. Balter doesn’t invest with Zimmerman, 38, who traded retail and consumer stocks at Steven Cohen’s SAC Capital Advisors LP for five years before founding Prentice in 2005.

Zimmerman isn’t the only manager seeking to raise money after a disastrous 2008, the worst on record for the $1.4 trillion industry. Jeffrey Gendell of Tontine Associates LLC in Greenwich, Connecticut, is planning a new fund after losses of more than 60 percent forced him to liquidate two pools. Hedge funds fell an average of 18 percent last year, according to data compiled by Hedge Fund Research Inc. of Chicago.

A spokesman for Zimmerman declined to comment.

Cohen’s SAC, based in Stamford, Connecticut, invested about $400 million in Prentice Capital Partners when it opened. The firm’s assets, which peaked at $2 billion, fell to $500 million as of November, according to the marketing documents, copies of which were obtained by Bloomberg News.

Blockbuster Bust

Zimmerman lost money on his three largest public holdings last year. Gaiam Inc., which sells fitness DVDs and nontoxic cleaners, fell 84 percent. Russ Berrie & Co., maker of gifts such as teddy bears, tumbled 82 percent and movie-rental chain Blockbuster Inc. dropped 68 percent. The companies represented about three-quarters of his U.S. stock holdings on Sept. 30, according to regulatory filings.

Prentice Capital Partners lost as much as 67 percent in December, according to two investors, who asked not to be named because the fund is private. The losses were due in part to Zimmerman’s marking down the price of private companies, they said. The companies included KB Toys Inc., a Pittsfield, Massachusetts-based toy retailer that filed for bankruptcy in December.

Morgan Stanley Fund Services, the administrator, restated the fund’s monthly net asset values for 2007 and 2008, according to a Dec. 10 letter to investors. Ernst & Young, the auditor, completed the fund’s 2007 report near the end of last year.

Trial Run

Prentice told investors in the letter that it made money with a separate account trading consumer and retail stocks that opened in April. The S&P 500 Consumer Discretionary Index fell 33 percent from May through December. The letter didn’t provide specific fund returns.

If Zimmerman raises money for the new fund, it would have two share classes. One would charge fees of 2 percent of assets and 20 percent of profits, and investors would be able to withdraw money quarterly, with 45 days’ notice. The second, for clients who agree to stay in the fund for at least a year, would charge a 1.5 percent management fee and a 15 percent performance fee.

Current Prentice investors wouldn’t pay performance fees on money put in the new fund this year, according to the December letter.

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net