Contrarians to Watch

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DANIEL PICKETT AND MARK FEDENIA

Daniel Pickett and his co-manager, Mark Fedenia, buck the conventional wisdom not just by buying unloved stocks but also by shorting overhyped ones. The fund aims to provide a positive return under any market condition, and its combination of strategies has Pickett's Nakoma Absolute Return Fund sporting less than half the volatility of the stock market overall. Over the past year the fund is up over 8%, while the S&P 500 has lost 4% (that's including dividends).

The two met when Pickett signed up for Fedenia's investing class at the University of Wisconsin. Fedenia ran the school's highly praised applied securities analysis program, which serves as a training ground for future fund managers by letting students oversee a multimillion-dollar portfolio. After working for other funds and a hedge fund, Pickett joined his former teacher at Nakoma in 2002.

Pickett frequently uses short positions not only to bet against a stock or industry but also to hedge against risks elsewhere in the fund. He says he's always looking at the ways different fund investments might interact as part of his effort to reduce risk. The fund has been shorting energy for several years, a move that has hurt performance as the price of oil hit new records. But high energy prices helped Nakoma's bets against retailing and consumer-dependent stocks pay off.

The fund also profited by going against the herd when investors dumped semiconductor stocks in the summer of 2006. The worry was that industry growth had peaked. Pickett saw the data but noticed that one equipment producer, Varian Semiconductor (VSEA), had a new design perfectly suited for the next generation of processors. He bought shares while shorting a group of its rivals. By October, 2007, Varian had more than doubled. The fund lost a small amount on the stocks sold short, but the hedge allowed Nakoma to buy more shares of Varian without worrying about excess volatility.

The fund also benefited last year from a huge short position it took in financial and housing stocks. Pickett says they've reduced that bet considerably now. "What we thought would happen has pretty much happened," he says. "We were pretty early, but we try to identify extremes and take a contrarian view."