Investment guru walks away from $4.2 billion fund

NEW YORK--Jeffrey Vinik, the 41-year-old manager of one of the biggest and best-performing hedge funds, unexpectedly said he's retiring and returning $4.2 billion to investors.

Vinik founded Boston-based Vinik Asset Management four years ago after quitting as manager of Fidelity Investments' flagship Magellan Fund in the wake of a wrong-way bet on bonds. Vinik's fund returned 46 percent the first nine months of the year. His assets rose sevenfold since he opened the fund with $800 million.

"Now he has the right not to be bothered by investors," said Mark Kenyon, head of Union Bancaire Privee Asset Management in New York, which invests about $4 billion in hedge funds.

Vinik is the third major hedge-fund manager to retreat this year, following Julian Robertson's retirement and George Soros' decision to scale back on risky investments. While the others made their moves after heavy losses, Vinik is quitting after beating U.S. stock benchmarks and building his firm into one of the 10 biggest hedge fund groups.

The New Jersey native and his partners, former Fidelity colleague Mike Gordon and ex-classmate Mark Hostetter, will oversee a smaller pool of money for themselves, so they can spend more time with their families, Vinik said.

Vinik, who said he will return the money by the end of the year, is already holding plenty of cash. "We've had a conservative view of the markets," he said in an interview. "We've been quite liquid, and there will be no problems having liquidity in full before the end of the year."

Investors said that at the end of September, 10 percent of his portfolio was in stocks he expected would rise, and another tenth in shares he reckoned would tumble. The rest was in cash.

Vinik said he and his partners had been considering scaling back for several months but had only recently made the decision.

"We've had four successful years," said Vinik, who works about 60 hours a week. "At this point I want to spend more time with my family." He has three children, ages 6 through 10, and his wife is pregnant, he said.

Vinik told investors that the volatility in the U.S. market, cited by both Robertson and Soros earlier this year, wasn't behind his decision to close his fund to outside investors.

"We believe moneymaking opportunities in the market will continue," said Vinik. "This was not an opinion on the market. I'm doing this solely for personal reasons."

While a struggling fund could be expected to shut down, investors in Vinik's fund said as recently as two weeks ago they visited his office and got no hint that he was considering shutting down the operation.

Some analysts said they suspect he's betting volatile markets may make it tougher to match his recent returns.

"He's locking in his returns to investors. He's got to believe that it will be more, rather than less, difficult to make money for the rest of the year," said Jim Lowell, editor of Fidelity Investor, an independent newsletter that focuses on the mutual-fund giant.

Vinik opened his own firm in downtown Boston, which now has 22 people, after 7½ years of managing money at Fidelity.

He left Fidelity in May 1996, after a big bet on bonds pulled down performance in Magellan, which that year had one of the worst performances among U.S. stock funds.

Fidelity and Vinik also faced lawsuits for price manipulation after he made comments to U.S. News & World Report praising Micron Technology while the fund was selling the semiconductor company's shares. Fidelity paid $10 million to settle the class-action lawsuit.

The bad press didn't hurt him in attracting money for his new fund. Within five months of leaving Fidelity, he'd raised enough money from investors such as Yeshiva University and clients of securities firm Donaldson, Lufkin & Jenrette to have one of the largest hedge funds at that time. He immediately closed the fund to new investors.

Gordon, now 35, came with him from Fidelity to trade. He brought on Hostetter, 41, who went to prep school with him at Riverdale Country School in the Bronx, to run the business. Hostetter, a lawyer by training, is also a third-generation Presbyterian minister.

Vinik's modus operandi is to trade aggressively, with positions in an average of 350 stocks. He doesn't use futures, options or derivatives.

His portfolio often looked entirely different from one quarter to the next. From time to time, he held large amounts of cash, which he did for much of this year.

Investors describe him as a modest and quiet man who doesn't live the lifestyle usually associated with someone worth a few hundred million dollars.

Although Vinik lives in a $2.3 million house in Weston, Mass., he drives himself to work and routinely eats a $3.95 fried chicken cutlet with tomato sauce on a roll for lunch, according to a recent article in Money magazine.

Investors who backed him were rewarded with returns that beat the benchmarks. In 1997, his first full year of operation, his fund jumped 75.7 percent after fees. In the two following years, he returned 44.8 percent and 29 percent.