Reversal of fortune as Falcone's hedge fund drops

Date: Tuesday, August 3, 2010
Author: Svea Herbst-Bayliss, Reuters

In the span of seven months, hedge fund manager Philip Falcone has gone from being one of the industry's better performers to one of its worst, according to new industry data.

The market tumult of May and June put a dent in the performance of many hedge funds. But Falcone's flagship fund, which focuses on distressed debt, may have been one of the biggest losers, according to new numbers from HSBC Private Bank.

As of July 15, Falcone's Harbinger Capital Partners Offshore Fund I was down 10.7 percent, ranking the New York-based fund manager one of the industry's 20 worst performers, according to HSBC.

Harbinger began the year with bang, with the offshore fund registering a 4.42 percent gain as of January 15. And the fund was in positive territory up until a few weeks ago.

Over the course of the year, the portfolio's assets under management have been nearly cut in half, falling from $6.7 billion to $3.8 billion as of mid-July.

At the end of May, Falcone's entire hedge fund complex had roughly $10 billion in assets which were invested in different portfolios.

The firm also has a pool of hard-to-sell assets called a side-pocket with about $2 billion which lost roughly 14 percent in the first seven months of the year.

It is not clear what has caused the big reversal of fortune at Harbinger. Several calls for comment to the firm were not immediately returned.

At the end of May, Falcone oversaw roughly $10 billion, invested in several portfolios portfolios.

But it does appear the slump at Harbinger, which in the past has posted strong double-digit returns, occurred rather suddenly. That is because on June 15, the 47-year-old former college hockey star's fund was still up 4.2 percent, HSBC data show.

Hedge funds are not required to report their performance and many do not if their numbers are embarrassingly bad. Falcone, whose outsized paycheck a few years ago prompted federal lawmakers to haul him before a Congressional panel to testify about the hedge fund industry, has consistently reported his data.

For Falcone, one of the industry's most closely watched investors, quick-paced drops and recoveries are familiar.

In 2007, Falcone's big contrarian wager that U.S. mortgage defaults would surge coupled with a bet that stocks of mining companies would soar, earned the fund a 116 percent gain.

His fortunes turned a year later when the fund fell fast in the middle of 2008 to end down 22 percent. Last year, he rebounded with a 46 percent gain, more than twice the industry average.

Earlier this year, Falcone's portfolio took on a new look and his shifts were profiled in a story on Reuters.

At the end of the first quarter, when the fund was up less than 2 percent, Falcone's single biggest U.S.-listed equity holding was Citigroup (C.N). He bought 70 million shares of the government-supported bank, making the purchase before the big plunge in bank stocks in May. But Citi has risen about 8.8 percent since June 1.

Investment firms of a certain size are required to disclose U.S.-listed equity holdings but not bonds which makes it difficult to fully discern a fund firm's investing strategy. Fund managers will say what they held at the end of the first quarter later, in two weeks.