Wheezing, fitful

Tenet Healthcare

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gets sicker with each passing day, but some of its largest investors continue to sit with their stakes, hoping for a miracle.

The faith of one constituency -- hedge funds -- is wearing thin.

Over the past several days,


Melissa Davis has chronicled another deluge of bad news for the hospital chain, including a recent court order requiring it

to pay $250 million to one of its co-founders for failing to honor his employment contract.

Davis also reported that the federal government has stepped up a probe of billing practices at three of its California hospitals, a probe that is in addition to a larger investigation into whether it carried out unnecessary medical procedures to collect fat Medicare outlier reimbursements.

Things are so bad that an analyst with research shop Fulcrum recently argued the company is never likely to recover and will probably end up being sold off in parts -- parts that are worth a combined $10 a share, at the most. Tenet closed Tuesday at $12.88, down from a 52-week high of $29.50 and well below the lows $50s it touched in fall of 2002.

So who's hanging in? Professional money, mainly. Institutions like mutual funds and pensions currently own more than 80% of the company's float. Indeed, the list of Tenet investors includes some of the great value investors of the country: Bill Miller of

Legg Mason Funds

, the super-respected

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Clipper Fund and even

Cascade Investment

, the outfit that runs Bill Gates' portfolio.

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Funds like Legg Mason and Clipper have enough time to wait out almost anything, provided there's reason to believe a return is possible. Tenet was recently downgraded by Standard & Poor's, which cited liquidity issues and its $4 billion in debt, and most analysts believe a full-blown recovery isn't in the cards next year. A long position in Tenet amounts to a bet that profitability can be restored before the company runs out of financing.

"I do think there is a case for a value investment if you have a lengthy horizon," said John Souter, an analyst with Susquehanna Financial Group. "I don't think that anyone is basing that case on 2004 numbers, though. Only if you go out into '05 could you say the stock should be bought here."

Unusual in Tenet's ownership base is the large number of hedge funds that bought into the company when the prospects for a quick turnaround were brighter. A recent

Securities and Exchange Commission

roster of the top 17 institutional holders places hedge funds Par Capital Management, SAC Capital Advisors and an outfit called Somerville Trading Enterprises as the 14th, 13th and 10th largest shareholders of the troubled company.

Hedge funds are generally more willing to bear risk in the name of big paydays but few are known for their long-term perspective. Lately, it appears the patience is waning or running out completely, particularly with management brought in to replace Jeffrey Barbakow, on whose watch the Medicare scandal broke.

One high-profile hedge fund manager who recently threw in the towel on Tenet blamed what he said was unresponsive managers. "I think in the hands of the right people they could do very well," he said. "If you could close your eyes and go away for a couple of years, you could make some money."

Another fund manager who's giving up said the nature of the business and the risks from Tenet's growing pile of lawsuits makes it a bad, if cheap, bet. (Both spoke on condition of anonymity.)

"In order for a turnaround to be truly successful in a market that has the government paying 40%, you need to be able to predict the environment for hospital services in 2005, and I do not think it will be all that hot," he said. "And I can't predict how much they will have to fork out for lawsuits and litigations."

SAC Capital Advisors, once one of Tenet's largest shareholders and one of the most powerful hedge funds on earth, shed 2.37 million shares this year, according to its last SEC filing. A spokesman for Steven Cohen's $4 billion behemoth didn't return calls about the 2.25 million shares it still owns. Arthur Epker, who runs Par Capital Management, a Boston health care fund, didn't return calls about Tenet; Somerville Trading Enterprises also didn't return calls.

While Cohen's fund is large enough to take the pain of Tenet's ugly price lurches, the firm isn't known for a value investment bias. Its investment style has been described as "trading on steroids."

The hedge fund world's frustration with Tenet could be heard in the voice of Omega Advisors' Leon Cooperman, once a major Tenet stockholder, on a spring conference call. (Cooperman, who has since sold most of his Tenet shares, was questioning the wisdom of new management announcing a stock buyback so early in its tenure.)

"I don't understand that. And the reason I don't understand it is you're making a very bold statement regarding the valuation of your company by virtue of channeling significant resources into stock repurchase," he said, according to a transcript on the Tenet Shareholder Committee Web site.

"I don't think a company's management, the board, can make

an intelligent decision on stock repurchase unless you have a view of earnings, earnings power, asset value, etc. The idea of stock repurchase, pure and simple, is to buy back an asset that sells at a substantial discount to its value. If the asset was fully valued or overvalued, only a fool would be buying back stock," Cooperman said.

Tim Bepler, a portfolio manager for the Bermuda-domiciled FMG Bio-Med Hedge Fund Ltd., said the remaining positions funds hold could be just the detritus of bets that are in the process of being unwound. He also said the stock, which trades with a negative beta, meaning it usually does the opposite of what the broader market does, is probably being used in volatility plays.

"I'd keep 80% and trade around the core position," Bepler said. "When there's a negative event, buy up more stock and then trade that. You get nice short-term income coming in while you continue to hold the core position."

Fred Nazem, venture capitalist and hedge fund manager, also has lost religion. As a backer of Tenet forerunner Republic Health, Nazem Group did well, he said. But as a value play, he says, there are better opportunities elsewhere.

"I think, frankly, there is so much more attractive stuff around," he said. He said management can make a big difference. "There are better choices. I'm not doing a lot of it, it's not on my radar right now."