SAN FRANCISCO (MarketWatch) — Joe Feshbach, who with brothers Matthew and Kurt ran one of the most high-profile short-selling hedge funds of the 1980s, is back.
This time, instead of betting against companies, a new hedge fund he’s starting — Joe Feshbach Partners LP — will buy securities of troubled firms.
Using a strategy called “crisis investing,” Feshbach, 51, will sniff out stocks and other securities that he thinks have dropped too far on negative news such as government investigations, accounting errors and profit warnings.
“I’m looking for companies with strong underlying businesses that are profitable, have strong balance sheets and where the likely impact of a crisis has been overestimated by the market,” Feshbach said in an interview Monday.
“I use crises as a trigger point to start researching an opportunity,” he added.
That’s a stark contrast to his former incarnation.
Stock busting
By 1990, the Feshbach brothers had built a $1 billion hedge fund business by aggressively shorting stocks. Their flamboyant style was typified by jackets they used to wear bearing the slogan “stock busters.” At Christmas they often mailed out mugs with the same motto.
Shorting involves borrowing shares and then selling them in the hope of buying them back later at a lower price.
As the economy pulled out of recession in the early ’90s, pure short-selling strategies became more difficult and the Feshbach brothers closed down after losses in 1991.
In the past five years, Joe Feshbach has held chairman, chief executive and other director positions at companies including Curative Health Services (CURE: news, chart, profile) and QuadraMed Corp. He also was a board member during a major accounting restatement at QuadraMed (QD: news, chart, profile) .
Feshbach’s been using the “crisis investing” strategy to trade with his own money. He claims the effort produced annual returns of 80 percent, excluding fees, in the five years ended in 2004.
Shorting is a ‘bad strategy’
But why not just start another hedge fund focused on short selling?
“Short selling is a bad strategy,” Feshbach said. “That’s because there are so many long/short equity hedge funds out there shorting stocks.”
When the Feshbach brothers plied their trade in the ’80s there were no more than 50 short-selling experts in the United States, he explained. “Now there are thousands of hedge funds with in-house experts focused on shorting.”
That means there are fewer interesting trading ideas — “inventory,” as Feshbach calls it — and more funds chasing those opportunities.
Five-page 10-Qs
Greater scrutiny on corporate disclosure and accounting standards will lead to cleaner books and fewer scandals, limiting a major source of short opportunities, Feshbach predicted.
Again, this is a far cry from the way business was done in the ’80s, he said.
Back then, quarterly financial statements companies filed with the Securities and Exchange Commission — called 10-Qs — were often only five pages long and didn’t contain any risk factors, according to Feshbach.
“If you had someone waiting at the SEC’s offices, you could get the 10-Qs before everyone else,” he added.
These documents can now run more than 100 pages and contain a wealth of information that’s freely available via the SEC’s Web site.
Useful experience
Still, years of experience rooting out potential corporate fraud for short-selling ideas will be useful in Feshbach’s new endeavor, he asserted. “If you can detect fraud before everyone else, you can also see through scandal and market panic to see what isn’t fraud.”
Feshbach isn’t completely giving up his old ways, though: The new fund may still use shorting “as an instrument to achieve high absolute returns, rather than as a hedging strategy,” according to a document sent to potential investors that was obtained by MarketWatch.
“Shorting is a skill,” Feshbach said. “If I see an opportunity to make lots of money using that skill, then why not?”
His new Woodside, Calif.-based fund will hold between five and 10 main positions and mostly trade securities of companies with market capitalizations of $250 million to $3 billion.
The fund is expected to begin operating on April 1.
Alistair Barr is a reporter for MarketWatch in San Francisco.
Source: MarketWatch
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