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Legg Mason Manager Heads for Hedge-Fund World

The brain drain in the mutual fund industry continues, as Lisa Rapuano moves to Matador Capital.

One of the brightest stars in

Legg Mason's

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stable of fund managers has moved on to the greener pastures of the hedge-fund world.

Lisa Rapuano has left the firm to become partner and chief investment officer at Matador Capital, a St. Petersburg, Fla.-based hedge fund, according to a person familiar with the matter. The 38-year-old Rapuano managed the

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Legg Mason Special Investment fund -- and her savvy work as a tech analyst in the 1990s helped stable mate Bill Miller find winning bets such as America Online and

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for his

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Legg Mason Value Trust fund.

Officials at Legg Mason and Matador Capital didn't immediately return calls for comment Wednesday.

The departure of Rapuano, who was also Legg Mason's director of research, continues the brain drain of high-profile money managers away from mutual funds and toward hedge funds --



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and a host of other firms has witnessed similar high-profile defections.

Rapuano's move marks a significant loss for Legg Mason. The skipper has notched impressive returns at the $3.39 billion-in-assets Legg Mason Special Investment fund, which she has managed solely since January 2001 -- she was co-manager with Miller the previous three years. The mid-cap fund returned 50.2% in 2003, and its three-year average annual return of 13.66% ranks the fund in the top 10% of all mid-cap blend funds, according to Morningstar.

Rapuano also earned her stripes at Legg Mason as the right-hand woman to Miller, whose investments in technology -- bold, unorthodox ventures for a value fund -- have helped the Legg Mason Value Trust fund beat the S&P 500 for 13 straight years.

Legg Mason's loss is a big win for Matador Capital, whose clients include Calpers, the massive pension plan for California state employees. The long-and-short hedge-fund firm is known for its stock-picking prowess in the micro-cap, small-cap and mid-cap arena, opting for reasonably valued growers that generate lots of cash flow. Rapuano's skills should complement the firm's strategy nicely.

Indeed, Rapuano and Matador are simpatico on several stocks: Some of the firm's bigger bets, such as career-education company


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and waste-management firm

Republic Services

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, turn up in Rapuano's fund.

Mutual fund firms have had a hard time retaining top talent as hedge funds continue to pluck the best skippers from the mutual fund ranks. Because hedge fund managers receive a fee based on the amount of assets under management plus a substantial percentage of positive returns, the annual salary can range in the seven- and eight-figure territory. Fund managers, meanwhile, typically make about $500,000 to $750,000 a year -- although some stars command seven-figure annual salaries.

contacted Cromwell Partners, a New York executive recruiter that conducted the search for Matador. Michael Martinolich, a partner at Cromwell, declined to discuss the specifics of the search.