Concentration Proves Winner At Hedge Fund Atticus Beats a Path That Others Follow

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  1. May 14, 2007



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    Concentration Proves Winner
    At Hedge Fund
    Atticus Beats a Path
    That Others Follow;
    Risk in Similar Bets?
    May 14, 2007; Page C1

    Tim Barakett is an old-school hedge-fund manager on a tear.

    The 41-year-old Mr. Barakett runs Atticus Capital LP, a $15.5 billion New York firm. He makes big, concentrated bets, doesn't care how volatile his performance is and dismisses the notion of cashing in through an initial public offering, like some other hedge funds are doing.

    While some large funds have seen limp results after adopting more-conservative styles, Atticus is racking up huge gains. Last year, the firm's flagship funds -- the $7 billion Atticus Global fund and the $8 billion Atticus European fund -- each rose about 40% after fees, compared with gains of about 14% for the Standard & Poor's 500-stock index. So far this year, Atticus European, co-managed by David Slager, is up 12%, and Mr. Barakett's Atticus Global is up about 8%, again beating the overall market. Both funds have annualized returns of about 27% after fees since they were established in 1996 and 2001 respectively.

    Mr. Barakett is estimated to have personally pocketed almost $700 million in 2006. His firm has grown by $5 billion in just the past year, with all but $500 million of that growth coming from investment gains, thanks to aggressive bets on everything from railroad and mining stocks to Deutsche Börse AG and MasterCard Inc.

    Now, the former Harvard hockey star, who once lost his front teeth in a game, is starting to throw his weight around. Earlier this month, Atticus sent an angry letter to Deutsche Börse -- the firm's largest position -- saying that "we are furious with your recent agreement to acquire the International Securities Exchange Holdings Inc. The transaction has negligible rationale." As much as 15% of Atticus's portfolio is in the German exchange.

    Last year, Atticus pressured management of Phelps Dodge Corp. to do a better job of using its cash, and it even hired bankers to look for a buyer before it agreed to a buyout by Freeport-McMoRan Copper & Gold Inc.

    Atticus was among a number of investment firms that were the subject of a 2005 inquiry by the German financial supervisory authority into potential collusive action in regard to the voting of shares of Deutsche Börse. The inquiry was dropped after the regulator determined it didn't have sufficient evidence to bring any charges.

    Mr. Barakett is at the forefront of a new group of hedge-fund titans. He started Atticus -- named after Atticus Finch, the crusading lawyer in the Harper Lee novel "To Kill a Mockingbird" -- with $5.8 million in 1996 after playing a year of professional hockey in Switzerland and doing stints at venture-capital and hedge-fund firms. It took him six months to raise money for the fund, but today investors are eager to get in.

    Mr. Barakett disputes the notion that Atticus is riskier because it takes a small number of big positions. But he acknowledges that "we're not the type of fund that is ideal for an investor with just one fund in their portfolio."

    It helps that his investors have faith. "They have a somewhat higher concentration than many others," acknowledges Jim Goodwin, a New York investor in Atticus since 1999. "But the real test is performance, and Tim and his team have been extraordinary."

    Increasingly, Atticus's moves are aped by other hedge-fund managers. And that is raising questions about whether too many funds are investing in the same stocks. The danger here is that if fast-moving hedge funds, or their own investors, start bailing out of the positions they share with Atticus, Mr. Barakett's firm will suffer. In October 2005, for example, the firm dropped 9%, its worst one-month decline, in part because so many hedge funds got nervous and sold stocks that Atticus also owned.

    Mr. Barakett says he can't help it if others copy his investments. He has taken steps to make it more difficult for rivals to track him, such as making derivative trades that don't have to be reported. He argues that when other hedge funds sell, it can help Atticus, since it can buy more of the stocks at cheaper prices. Indeed, by the end of 2005, Atticus had regained all the losses sustained in that painful October.

    Other times he has found that he holds the same positions as Chris Hohn, a friend from Harvard Business School who runs Children's Investment Fund Management, a London hedge fund. Both firms have held Deutsche Börse, Euronext, CSX Corp. and Link Real Estate Investment Trust. Mr. Barakett says that while he talks to Mr. Hohn a few times a year, they sometimes hold the same stocks only because they are attracted to companies with similar traits, although they sometimes differ on the strategies those companies should follow.

    Atticus usually avoids technology, retail and health-care stocks, figuring it is harder to get an edge in those areas. It looks for companies that are dominant players in a market, have little debt and are out of favor. Mr. Barakett then assigns analysts to dig deeply. Several years ago the firm put together a mine-by-mine model of copper around the world, helping Atticus anticipate a recent surge in copper prices.

    Most recently, he has become a fan of railroad companies. Last summer, as investors became nervous about these stocks as the economy slowed, Atticus started buying. The firm was attracted to the updated infrastructure and pricing power of rail companies, and their improving relative position compared with truckers.

    Atticus now has 20% of its money in rail stocks such as Union Pacific Corp. and Burlington Northern Santa Fe Corp., according to securities filings. The moves looked savvy when Berkshire Hathaway Inc.'s Warren Buffett recently disclosed he was a buyer of rail stocks and shares moved higher.

    "People enjoy talking to Tim. He's great at finessing information that maybe they wouldn't normally disclose" and using it for his investments says Rick Frisbie, co-founder of venture-capital firm Battery Ventures, who was Mr. Barakett's boss from 1988 to 1991.

    Investors say the 36-year-old Mr. Slager also is a big reason for the firm's recent success. A British expatriate who moved to New York to work more closely with Mr. Barakett, Mr. Slager wins high marks for identifying opportunities and rarely wavering, even when his stock picks are down.

    "We've built a great team," Mr. Barakett says. "But you have to give luck its due."

    While he no longer plays competitive sports, Mr. Barakett says the market is enough of a game. "I was always obsessed with statistics, mine and others, and comparing myself to others," he says. "I have a great outlet for that here" at Atticus.

    Write to Gregory Zuckerman at gregory.zuckerman@wsj.com1

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