Jeff Vinik, in a move that echoes his departure 17 years ago from the Fidelity Magellan Fund (FMAGX:US), is shutting his hedge fund after making ill-timed bets on gold and the direction of stocks.
Vinik Asset Management LP, which oversees about $6 billion, will give clients all of their money back at the end of June, according to a client letter obtained by Bloomberg News. The owner of the Tampa Bay Lightning professional hockey team and a minority investor in the Boston Red Sox, Vinik founded the firm after stepping down in 1996 as head of Magellan, then the largest U.S. mutual fund, with more than $56 billion in assets.
While Vinik has beaten the market since starting the hedge fund, he stumbled 10 months ago after a restructuring at the firm. He relocated from Boston to Tampa and shifted from stock picking to an oversight role that included analysis of macroeconomic trends and risk management, only to have his hedge fund trail stocks by a wide margin.
“While we are very proud of our excellent long-term record of 17 percent annualized returns since we started VAM in 1996, the last 10 months have been more difficult following our restructuring,” Vinik said in the letter, adding that his fund is down 4.8 percent since last July. “It is time for us to take a break.”
In tandem with his move to Florida, Vinik consolidated funds that were separately run by he and other managers at the firm, including co-founder Michael Gordon. A growth-oriented strategy is run out of Boston while a Tampa-based team focuses on value investing in stocks and bonds.
Gordon runs the growth team, which supplements bets on companies with good earnings prospects by investing in exchange- traded funds tied to industries and the broader markets. David Iben, the former chief investment officer of Tradewinds Global Investors, joined Vinik Asset Management in June to head the value group.
According to a March investor presentation, Vinik’s role is to oversee the consolidated portfolio, allocating capital among the different managers and focusing on his “strongest skills,” cited as macro analysis, industry selection and risk management. Following the restructuring, which was completed on June 30, the combined fund lost 0.43 percent during the remainder of 2012 and rose 0.69 percent during the first two months of this year, according to the investor presentation.
Since the firm was reorganized, its net assets dropped almost 11 percent to $6.03 billion as of March 1 from $6.74 billion on July 1 of last year, according to filings with the U.S. Securities and Exchange Commission.
This year’s underperformance may have stemmed from a decision to call off a large bet on U.S. stock markets. During the fourth quarter, the fund sold its $1.2 billion stake in the SPDR S&P 500 ETF Trust, a $370 million holding in the Powershares QQQ Trust, which tracks the Nasdaq 100 Index, and an $804 million stake in the iShares Russell 2000 Index Fund. (IWM:US)
Each of these three market index funds reached a 52-week high today, with the SPDR Trust up 13.3 percent so far this year and the Russell 2000 fund up about 12.4 percent. Vinik Asset Management’s holdings of U.S. stocks dropped to $3.4 billion on Dec. 31 from $5.9 billion as of Sept. 30. The firm had gross assets, including leverage, of $9.5 billion at the end of last year, according to regulatory filings.
At the same time, gold mining shares comprised about 14 percent of the U.S. traded stocks that Vinik Asset Management reported owning. As signs increased that the economy is improving without causing inflation, gold and mining stocks plunged in April, leading to losses for billionaire investors John Paulson and Paul Singer as well as Vinik.
Vinik Asset Management’s largest holding, the Market Vectors Gold Miners (GDX:US) exchange-traded fund, has lost 36 percent this year. Barrick Gold Corp. (ABX), his second-biggest holding, has declined 43 percent, and NovaGold Resources Inc. (NG) has lost 45 percent.
A broad macro bet had marked the end of Vinik’s career at Fidelity Magellan, a growth fund formerly run by Vinik’s mentor Peter Lynch. During the fourth quarter of 1995 and first quarter of 1996, Vinik cut Fidelity Magellan’s technology holdings to 3.5 percent of net assets from 40 percent, stating that revenue growth was slowing at such companies. He simultaneously plowed 21 percent of the fund into U.S. Treasuries.
The move generated an outcry from shareholders who complained that Fidelity Magellan shouldn’t be investing in bonds. Vinik, who beat the market with average annual returns of 18 percent through 1995, left Boston-based Fidelity the next May and Magellan finished the year with a total return of 12 percent, about half the 23 percent gain recorded by the S&P 500.
This isn’t the first time that Vinik has stepped back from managing hedge funds. He gave back most of about $4.2 billion to investors in late 2000 after generating a 46 percent return during the first nine months of that year. After a four-year break, Vinik started accepting capital again, mainly to invest his own money along with cash from friends, family and a few outside clients.
In today’s letter, Vinik said that his team would “work tirelessly” to produce the best possible returns for investors during the next two months. “The liquidity of our portfolio has improved dramatically” over the last several weeks, Vinik said in the letter, adding that the firm expects to be “100 percent cash” by June 30.
Vinik said he plans to focus on Tampa Bay Sports and Entertainment, the parent company for the Lightning, as well as his charitable foundation and family. The Lightning, which Vinik purchased along with the St. Pete Times Forum in February 2010 for $110 million, had the third-worst record in the National Hockey League this year.
Mike Gordon and Mark Hostetter, Vinik’s co-founders, are also planning to spend more time with family and charitable endeavors, according to the letter. Portfolio managers Doug Gordon, Jon Hilsabeck and Don Jabro plan to start an long-short equities hedge fund based in Boston, Vinik said, while Iben intends to form his own independent investment management company, possibly based in Vinik Asset Management’s Tampa office.
Hostetter, vice chairman of Vinik Asset Management, declined to comment on the decision.
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