SAN FRANCISCO -- A terrible year for so many investors is coming to a close in a fairly benign way. More stocks rose than fell, while major averages ended uniformly higher for the second straight session today. The
Dow Jones Industrial Average
rose 0.6%, the
gained 0.4% and the
But a few days do not a year make, and there will be repercussions. Talk in the hedge fund community this week -- where few are on vacation, by the way -- is that
Red Coat Capital Management
is one potential victim of this year of living dangerously. One twist is that it wasn't tech stocks alone that wounded (perhaps mortally) the Manhattan-based hedge fund, but ill-fated bets on entertainment and consumer stocks.
"They had a highly leveraged product that came unglued," said one hedge fund source, who requested anonymity. "This is one example of stuff that's gone on this year that's not too good."
Kenneth Londoner, CEO and partner at Red Coat, denied reports that his fund has suspended redemptions and/or is planning to shutter its operations shortly after Jan. 1. He called such scuttlebutt "completely untrue" and "completely unfounded."
Despite Londoner's adamant denials, I'm reporting on the rumors because I recall the repeated and steadfast
before that hedge fund giant eventually
succumbed early this year. Second, there's no denying that Red Coat capital struggled in 2000.
Londoner declined to discuss Red Coat's individual holdings or overall performance. But based on the fund's top holdings at the end of the third quarter, Londoner's characterization of the past year as "challenging" would seem to be a classic under- or misstatement, assuming the fund did not bail out of these positions.
The fund's top position at the end of the third quarter, according to
, was 2.6 million shares of
, which was down 38.7% for 2000 heading into today's session (where it rose 11.5%).
Other of the fund's largest holdings, and their year-to-date performances through yesterday, include: 2.9 million shares of
, down 94.1%; 1.9 million shares of
Disney Internet Group
, down 81.9%. Another position,
Cutter & Buck
, which was added in the third quarter, according to Red Coat's
Form 13F-HR, has fallen 33.2% during the fourth quarter.
, down 32.1% for 2000 and 43.6% since closing its acquisition of
on May 31, was also one of Red Coat Capital's biggest holdings as of Sept. 30, according to Bigdough. But sources familiar with the fund say it has since exited from the position. If true, that could partially explain MGM's recent struggles, given that Londoner's stake was 1.4 million shares on Sept. 30.
Londoner acknowledged that Red Coat has suffered redemptions, but expects to enter 2001 with between $100 million and $125 million of capital. Londoner refused to comment on the fund's peak size, but Bigdough.com reports that it was $273.6 million as of Sept. 30. Sources say the fund's peak was substantially higher still.
In the Footsteps of Giants
The situation at Red Coat seems to have some similarities with what transpired at Julian Robertson's Tiger Management.
Like Robertson, Londoner hired high-priced talent but insisted on running the majority of the fund's assets himself, sources familiar with the developments say. And like Robertson, the sources say Londoner failed to follow his own preset rules about selling stocks that have fallen by a given percentage, choosing instead to press his bets. That may explain why Red Coat suffered despite also having big positions in stocks such as
, each of which is up more than 50% this year.
Finally, Londoner's fund is facing an exodus of the aforementioned high-priced talent, similar to what
transpired in the denouement of Robertson's Tiger.
Londoner confirmed that those planning to leave Red Capital shortly include Richard Swift, a cable, media, lodging and specialty retail analyst, and John Fleming, a financial services analyst, who are planning to start their own hedge fund. David Wolf, a gaming analyst who joined Red Coat from
at the beginning of this year, is leaving to join
Swift and Fleming did not return phone calls seeking comment. Wolf is on vacation.
Londoner denied that the aforementioned are leaving because he refused to share the ball, suggesting they all are leaving on friendly terms. Unprompted (I swear), he compared the situation with that of Tiger Management, where several employees left over the years to start their own hedge funds.
Rick Abeyta, a generalist who is also leaving Red Coat to join Swift and Fleming in their new venture, confirmed that there is no bad blood. He declined to comment further on either his new venture or goings-on at Red Coat.
If Londoner continues operations next year, as he says is the plan, sources predict it will be on a dramatically scaled-down basis (inevitable given the declining capital base). Another hedge fund manager suggested Londoner might be better served to go ahead and shut down Red Coat Capital and then "start over again" with a new fund with whatever capital current investors choose to leave in his stead. That way he won't have to worry about recouping this year's losses.
If that sounds fanciful, recall that John Meriwether, who oversaw a far bigger and more serious decline at
Long Term Capital Management
, is back in the hedge fund game with a
(More) Housecleaning 2000
last night, a long overdue update of our periodic report card appears below.
Remember, the performance column assumes an investor held the stocks from the time the call was made through yesterday's close. The reality is that most of the sources (hopefully) altered their portfolios during the intervening period. While that's always true, that's likely more so this time given the market's performance in the second half of 2000 and that these picks are from the third quarter (I did say "long" overdue, didn't I?).
Unfortunately, I wasn't able to catch up with many sources to get updates on how they've dealt with what are some big losers.
I did reach Brian Gilmartin of
Trinity Asset Management
, who bravely declared that he is still buying the same big-cap growth names as back in early August.
"But we added financials as a much heavier percentage of the portfolios once it became apparent in October that this would not be the standard 10% correction," he said, mentioning
Morgan Stanley Dean Witter
Another source I reached was Arthur Bonnel, manager of the
U.S. Global Investors Growth fund, which is down 17.2% this year, according to
Space constraints prohibit more detail, but Bonnel said he exited all of the stocks listed below by mid-October, save
, which he still owns. In the past two weeks, the fund has retaken positions in
, he said.
Look for more on Bonnel's recent actions and outlook for the coming year in a forthcoming column.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.