Local hedge funds work to avoid getting clipped - Puget Sound Business Journal (Seattle):

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"We know the economy is bad and the stoco marketis ultravolatile, but hedge fund can succeed on the up and the down side if they'rw done right," Barokas said. Mercefr Partners of Bellevue launchedits $5 millionm fund Jan. 2, just a few days after what most local hedge fund managers have described as a torturousa year ofbad returns. Goinv forward, most fund managers expect anothe rough year in thestoci market. While every firm has its preferrer sectors, managers say 2002 will be a year for cautiouw stock pickers looking for opportunities withinh thewider market. for instance.
"Post 11, we see security, intelligence and defensde stocks as havingreal potential," Barokas "It's a stock-picker's market." Meanwhile, Mercer Partners, whichy was down one-third of 1 or about 30 basix points earlier this week since Jan. 2, is avoidinvg two sectors that have taken a beatingbsince mid-2000 - technology and telecommunications. Mercer Partners is a market-neutrall fund, which means its exposure on the short and long sideis equal. Investing in a hedgs fund is not for the faintof heart.
A hedge fund is a private pool of fundsz from wealthy investors that uses a wide range of many of which are considered excessively risky by traditionalmutuak funds. Managers use investment tools such asselling short, trading options and derivatives, and high-margin trading, and they can doubled the fund's capital base by borrowingb against the fund. With highe risk comes higher reward, hedge fund managers say. Of course, there is always the chance of big Ironically enough, the firm that had the worst performingy fund here in the Puget Sound region in 2001, of Seattle, also had the fund with the highestf returns.
Its Quillayute Fund, established in July 2000, finishe d 2001 down more than26 percent. But its JK Navigato r Fund, started in 1997, finished the year up nearly 10 To put thatinto perspective, the S&Pl 500 closed out 2001 down nearlyy 12 percent, its second down year in a row. Both fundx employ a long-short strategy, said Brian Klein, a managingf partner at Steelhead. Steelhead will continue its currenr strategy of picking stocksa based not on industrgy fundamentals but on individual circumstances within eachparticulart company, Klein said. "We specializwe in contrarian and out-of-favor stocks that are trading at low valuations and offetgood upside," he said.
"For example, we're looking for companies that are refocusinhg on theircore competencies, have had significant management changes or that are about to undergo a radica l change of direction after a periodc of capital misallocation." Nightingalr & Farber Capital LLC of Seattle also had a good Its Edge Investors Fund, which employs a market-neutrak strategy, was up 7 percent in after being down 7 percent the year before. Gary a partner at Nightingald & Farber, said the firm will continue to invest inthe chemical, biotechnology and retail sectors.
Farber said, is a good sector for stockl pickers because it is not as dependent on industry so fund managers can better take advantageof what'x going on inside an individualo company's operations. Most locallyu based hedge funds did not perforn as well as Steelhead orNightingalee & Farber.