Palisades Fund Nears Cliff

Indeed, in subsequent investor letters, Mannion and Reckles promised that World Health would recover and reassured investors that the value of the company wasn't completely lost. But despite the managers' promises, the side pocket ultimately became worthless.

"They had a lack of judgment and common sense," says the investor, who didn't want to be identified. "They allowed the fund to get very concentrated, and then when they started running into trouble, they started throwing good money after bad."

To be fair, Palisades wasn't always having problems with its investments. The fund was up more than 10% for the year in December 2005, and on an annualized basis the fund is still up 31% since its inception a little over four years ago, according to Mannion.

In light of their track record, not all investors have soured on Reckles and Mannion. One, in fact, says they managers can still turn things around and put the fund back on a sound footing.

"I am extremely optimistic about the next six to 12 months for them," said one investor in the fund. "I think their valuation policy is one of the most conservative and rigorous in the industry.''

Still, the managers don't have a clean slate. In 1995, Reckles was permitted to resign from Prudential Securities after a customer complained about his sales practices. Reckles, who could not be reached for comment, "categorically" denied any problems. Prudential Securities used to be part of Prudential Financial(PRU Quote - Cramer on PRU - Stock Picks).

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