June Is Cruel to Big Names As Prentice, Tosca Get Hit - WSJ.com

June Is Cruel to Big Names As Prentice, Tosca Get Hit - WSJ.com: "June Is Cruel to Big Names
As Prentice, Tosca Get Hit
By JENNY STRASBURG and GREGORY ZUCKERMAN
July 11, 2008; Page C1

June Is Cruel to Big Names
As Prentice, Tosca Get Hit
By JENNY STRASBURG and GREGORY ZUCKERMAN
July 11, 2008; Page C1

The June stock-market rout has battered two high-profile hedge funds.

Prentice Capital Management LP, the New York firm started in May 2005 with about $400 million in start-up money from the huge hedge-fund firm SAC Capital Advisors LLC, has plunged 46% this year. Almost half of that drop happened during June as the value of the firm's stock and debt investments in retailers plummeted, according to investors.

Last month, Prentice barred clients from withdrawing money, resorting to a defensive step hedge funds can take to avoid selling assets in desperation when clients ask to pull significant amounts.

In London, an even bigger hedge fund, Martin Hughes's Tosca Fund, has declined almost 30% this year as its bets on financial and U.K. home-builder stocks suffered.

The fund, which started the year with about $5 billion in assets, is the largest overseen by Toscafund Asset Management LLP, started in 2000 after Mr. Hughes left star investor Julian Robertson's Tiger Management. Tosca headed into this year bringing in new money, in no small part because it posted three straight years of 20% or better gains, according to investors.

Mr. Hughes's firm, which manages a total of more than $7 billion, "continues to see net fund inflows from long-term investors," says spokesman Neil Bennett. He adds: "The company believes it has invested in high-quality companies" in "deeply unfashionable sectors" where values will rebound.

Toscafund and Prentice both declined to comment on performance. Their troubles contrast with the average return of negative 0.75% by hedge funds globally -- and negative 3.3% for stock-picking funds -- during the first half of 2008, according to statistics compiled by Chicago research firm Hedge Fund Research Inc. More than a decade has passed since hedge funds collectively had a worse six-month period to start a year.

Meantime, hedge funds have boomed out of a cottage industry to become a powerhouse with $1.9 trillion in total assets. Last week, hedge-fund manager Jon Sandelman, who manages almost $4 billion, told investors in his New York firm's largest fund that they will have to wait to get their money back. Clients representing about 20% of the fund had sought to withdraw their investments. The Sandelman Partners Multi-Strategy Fund Ltd., which invests in stocks, bonds and other securities, has declined about 5% this year after slipping less than 2% last year.

Despite some struggles, hedge-fund performance is comparing favorably this year to key stock-market indexes. The Dow Jones Industrial Average lost more than 14% during the first two quarters, the Standard & Poor's 500-stock Index slipped about 13%, as did London's main index, the FTSE 100.

Amid the turmoil, Prentice has shrunk to about $1.4 billion in assets from more than $2 billion at its peak. Its chief executive, Michael Zimmerman, 38 years old, previously spent five years managing retail investments at Steven Cohen's SAC, based Stamford, Conn. SAC over time has decreased its investment in Prentice significantly, says a person familiar with the matter.

Retailers' sinking fortunes have hit Prentice hard as sales of everything from jeans to jewelry have weakened.

One of Prentice's biggest money-losing bets this year is Goody's Family Clothing Inc., the discount-store operator that filed for bankruptcy protection last month. Soon after, Whitehall Jewelers Inc., another of the hedge fund's investments, did the same.

The value of those stakes, which include stock and debt and were marked down sharply in the past month, could recover as the companies restructure.

Mr. Zimmerman warned investors in a June 6 letter that things could get worse before they get better. "We will most likely have to materially mark down or entirely write off a few investments over the ensuing quarters," according to the letter.

He also says in the letter that Prentice hopes to lift its suspension of withdrawals from the fund within six months.

Write to Jenny Strasburg at jenny.strasburg@wsj.com and Gregory Zuckerman at gregory.zuckerman@wsj.com