Short hedge funds got no reason to rally, it seems.

A rising fourth-quarter tide in technology stocks wasn't enough to bail out the offshore technology hedge fund run by

Andor Capital Management

, which finished 2003 down 15.7% after sticking too long with a short bias.

A tech sector that looked flat turned around at midyear, despite few apparently compelling factors. That left the $7 billion firm scrambling to unwind its short positions and ride the rising valuations. It managed to do that by August, posting a 2% gain for the fourth quarter.

A letter sent to investors called the 2003 results "disappointing," adding, "Andor's strategy went awry last year." The hedge fund manager had $9 billion in assets under management last May, making it the world's second-largest hedge fund operator, according to Hedge Fund Intelligence, a London research firm. With current assets at about $7 billion, it probably remains among the 10 largest hedge fund operators.

Andor founder Dan Benton and President Christopher James wrote to investors and said that the firm is ready to rebound, although they remain concerned that technology stock valuations are out of sync with actual performance.

"Companies were still losing money and valuations looked ridiculous. So we waited for earnings reports," the letter said. "Besides, we couldn't find any stocks that looked like longs in our models. We were right when

Nokia

(NOK) - Get Report

and

Texas Instruments

(TXN) - Get Report

negatively preannounced" in the second quarter, the letter continued. "But the stocks continued to soar."

Andor declined to comment on the letter.

After being net short for most of the year, Andor scrambled to shift its bias, and managed to do so by the end of the third quarter. The $2.6 billion technology portfolio was about 29% long for whole year, but 76% long for the last quarter.

"As an aside, it's not easy to stay short," Benton and James wrote. "Vicious bear market rallies test your conviction. More often than not, the market is optimistic about the future, so the path of least resistance for stocks is up. When you are net short, you are a pessimist -- you are constantly looking for bad news to reinforce your position. You make money when others lose money and you lose money when the market goes up -- it gnaws at you every day."

Andor's technology funds, started in 1996 by Benton when he was at Pequot Capital, enjoyed rousing success in the technology boom. The offshore technology fund was up only 0.5% for the past three years, however, indicating its best years were a product of the go-go late 1990s.

"We made mistakes in 2003," the letter said.

Benton said he took over management of the technology portfolios after manager Nick Romano left the firm. Andor also cut its ties with David Felman, portfolio manager of the firm's diversified growth funds, which were down 17% and 21.5% at the end of November, and put James at the head of that portfolio after closing a $250 million fund. Benton and James are jointly managing the firm's other funds.

Analysts Steve Pasko and Gary Wolk, responsible for software and communications, respectively, left Andor and were replaced internally. Under Benton's direction, software head Michael Beckwith and Mark Bertagnolli, head of the communications sector, will work with fellow senior analysts Spencer Wang and Michael Tierney "to assure that our technology funds return to the form demonstrated in the nine years prior to 2003."

Benton and James promised investors they would slow their launches of new funds, because "it takes time and skill to find great portfolio managers."