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|  | DECEMBER 23, 2005
The Rewards of ConcentrationDiversification is the "plain vanilla of investing," says Peconic Partners' William Harnisch. Among his picks: TransOcean and GoogleDiversification is an honored rule in stock investing. But not to William Harnisch, who heads hedge fund Peconic Partners, with assets of $600 million. Harnisch, based in Midtown Manhattan, advocates a different rule: "Concentration." Calling diversification "the plain vanilla of investing," Harnisch says, "If you want mediocre results, go for diversification. To catch the high waves and snare sizable gains, concentrate your capital in winners." Harnisch's record since 1990 has been impressive: He has chalked up an average annual return of 20% -- with market exposure of only 30%. Over a lunch in Peconic'sboardroom overlooking Park Avenue, Harnisch talked about winning in the stock market with BusinessWeek Inside Wall Street writer Gene Marcial. Here are edited excerpts from their conversation: Could you talk about why you favor a strategy of "concentration" as opposed to diversification. The easy way of investing in the market is to spread the money in as many sectors as possible. The thinking is that by doing so, you minimize or even eliminate all risks of losing your investment capital. Balderdash! You could as easily lose all or most of your money by covering or investing in 100 stocks in every industry. The idea should be to pick the best stock -- no matter where or which industry it belongs. Once we identify or pick the stocks, we acquire as much shares as we can. Our concentrated bets are based on our analytical edge. How are your funds allocated at this point? In the hedge-fund business, you have to be very pro-active because change is constant. So updating or restructuring a portfolio could be instantaneous. Two months ago, we were very bearish, but since then we have switched our strategy to the bullish side. We're concentrating in just 76 stocks -- we are long in 42 and short on 34. The market averages have been going back and forth so many times in the past two months that we have to keep rearranging our portfolios. Our decision on whether to boost our long or short positions depends on any 3% to 5% change in the direction of the market, usually driven by the fundamentals. How do you avoid great risks given your concentrated positions in a limited number of stocks? In constructing our long and short positions, we make sure we control the risks. That's basic to us. Our portfolios are constantly hedged to reduce volatility. This allows us to have concentrated positions in our portfolio while maintaining risk levels comparable to the overall market. Typically, our top 10 ideas account for 40% to 50% of our positions. Our largest concentration ranges from 5% to 10% stakes. Right now, our positions are highly liquid in the mid-to-large-cap stocks. Our success is due to constantly monitoring in real time the market and our holdings to efficiently and quickly jump on the changing market conditions. How is Peconic Partners different from other hedge funds? Unlike most hedge funds, Peconic is a SEC registered investment adviser, which manages four limited partnerships, plus an offshore investment company. We also manage separately assets of other hedge funds. Our hedge fund evolved from Forstmann-Leff Associates, which I managed from the late 1970s to 2005, when I formed Peconic. The management of Peconic has over $100 million invested in the fund. We are growth investors and we identify the ones we figure will help provide long-term returns in excess of 15% annually. What other metrics do you use? The necessary attributes in our picks include superior management, dominant positions in their markets, strong and transparent financials, and a sustainable, attractive risk-reward profile. Basically, our decisions are driven by fundamentals. But when there's a technical breakdown in the stock, we put in an alert-watch for any quick changes. What prompts you to reduce your holdings or sell a stock? Two things. On fundamentals, we get out when we no longer believe in the original investment thesis we had in the stock or when our target price objective has been met. On the technical side, we bail out when a stock violates its 200-day moving-average price trend or when the stock hits a period of supernormal appreciation. What stocks top your bullish list? We were short the oils two months ago, but we have reversed our position. We are bullish on TransOcean (RIG ), which is dominant in offshore deep-water oil drilling. We bought shares in the $20s and it's now [in the $60s]. We expect the stock will continue rising because it's the most sophisticated in drilling in deep water, where many oil companies are now exploring for crude. And we're very bullish on Google (GOOG ), despite its meteoric rise. We got into the stock early, when it was $98. We think Google will fly to $500 in 12 months. We're also long on SBA Communications (SBAC ), which we started buying when it was at $4 a share two years ago. We expect it will hit $25 in a year. What are your favorite shorts? Ford (F ) tops our short list. It hit a high of $11.37 in June and dropped to $7.65 on November 16, 2005. We first shorted Ford when it was at $11 and we covered when it hit $8. We're again short the stock. We think it will go way below $6. We're also short Sears Holdings (SHLD ). We shorted it in September when it was trading at $123. We think it has ways to go -- on the downside. Our past shorts included Krispy Kreme (KKD ), which we shorted when it was at $39 a share. We covered our position when the stock dropped to $7. How do you attract clients? We don't advertise. We think performance is the key to attracting clients. Mostly, our institutional clients refer their colleagues to us. We figure that if we continue posting annual returns of 20% or higher, investors will seek us out.  Edited by Patricia O'Connell Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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