Hedge Fund Tracking: Tontine Associates (Jeffrey Gendell), Q3 2008

This is the Third Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the preface to the series we're doing on Hedge Fund 13F filings here.

The other funds we've already covered include:

• Timothy Barakett's Atticus Capital
• Whitney Tilson's T2 Partners
• Peter Thiel's Clarium Capital
• Bill Ackman's Pershing Square
• Bret Barakett's Tremblant Capital
• John Paulson's Paulson & Co
• David Einhorn's Greenlight Capital
• Dan Loeb's Third Point
• Paul Tudor Jones' Tudor Investment Corp
• Louis Bacon's Moore Capital Management
• Bruce Kovner's Caxton Associates
• George Soros Soros Fund Management
• Chase Coleman's Tiger Global
• Stephen Mandel's Lone Pine Capital
• Lee Ainslie's Maverick Capital
• John Griffin's Blue Ridge Capital
• Andreas Halvorsen's Viking Global
• Chris Shumway's Shumway Capital Partners
• Paul Touradji Touradji Capital
• Eric Mindich's Eton Park Capital
• Barry Rosenstein's Jana Partners
• Seth Klarman's Baupost Group
• Art Samberg's Pequot Capital Management
• Ricky Sandler's Eminence Capital
• Thomas Steyer's Farallon Capital Management
• Philip Falcone Harbinger Capital Partners

Next up, is Tontine Associates. It was founded 11 years ago, and is a $6 billion firm run by Jeffrey Gendell. Gendell graduated from Duke and worked in Corporate Finance for Smith Barney. He specializes in macro investing and takes very large, concentrated positions in companies he feels will benefit from those macro themes. Additionally, he will take on an activist role when necessary, to ensure shareholder returns. The fund has posted returns in excess of 100% in both 2003 and 2005.

Conversely, this year has been the year from hell for Tontine. Recently, the firm recently announced that it would be closing two of its hedge funds: Tontine Capital LP and Tontine Capital Partners LP, while two of Tontine's funds will remain open: Tontine-25 and Tontine Financial. As we noted in our post on hedge fund performance numbers, Tontine was -65.7% for the month of October and was -76.8% for the year at that time.

It has definitely been an astonishing year for Gendell, whose Tontine firm is named after an annuity invented by Lorenzo de Tonti. In such an annuity, investors contribute and collect dividends. As investors each die off, their share is left to the remaining partners. Therefore, the last man alive receives all the money. Gendell's desire is clearly to be that 'last remaining’ investor. Such a goal becomes slightly ironic when you consider his firm suffered monumental losses and almost 'died' this year. Gendell explained the turmoil the firm faced in his October letter to investors (.pdf file).

The following were its long equity, note, and options holdings as of September 30, 2008 as filed with the SEC. All holdings are common stock unless otherwise denoted.

Some New Positions (Brand new positions that it initiated in the last quarter):

• Navistar (NAV)
• Ultra Financials ETF (UYG)
• OM Group (OMG)
• General Cable (BGC)
• Myr Group (MYRG)
• Mainsource Financial (MSFG)
• Marshall & Isley (MI)
• First Horizon (FHN)
• First Midwest (FMBI)
• Summit Financial (SMMF)
• National City (NCC) Calls

Some Increased Positions (A few positions it already owned but added shares to):

• Emcor (EME): Increased position by 44.5%
• Perini (PCR): Increased position by 33%
• AK Steel (AKS): Increased position by 30%
• Graftech (GTI): Increased position by 19%
• Citigroup (C) Calls: Increased position by 11%

Some Reduced Positions (Some positions it sold some shares of - note not all sales listed):

• Foster Wheeler (FWLT): Reduced position by 50%
• Goodyear Tire & Rubber (GT): Reduced position by 32%
• KBR (KBR): Reduced position by 28%
• Cliffs Natural Resources (CLF): Reduced position by 23.5%
• DST Systems (DST): Reduced position by 22%
• Quanta Services (PWR): Reduced position by 18%
• Trinity Industries (TRN): Reduced position by 18%
• Trueblue (TBI): Reduced position by 16%
• Shaw Group (SGR): Reduced position by 15%
• AMR (AMR): Reduced position by 13%
• A.O. Smith Corp (AOS): Reduced position by 13%

Removed Positions (Positions it sold out of completely):

• Marsh & McLennan (MMC) Calls
• Meritage Homes (MTH)
• Citizens Republic (CRBC)
• BCSB Bankcorp (BCSB)
• Firstfed Financial (FED)
• Meta Financial (CASH)
• Astoria (AF)
• Hawkins (HWKN)
• New York Community Bancorp (NYB)
• United Bankshares (UBSI)
• American International Group (AIG) Calls
• Community Bank System (CBU)
• Horton DR (DHI)
• Downey Financial (DSL)
• Koppers Holdings (KOP)
• Centex (CTX)
• Ryland Group (RYL)
• National City (NCC)
• Toll Brothers (TOL)
• AZZ (AZZ)
• Englobal (ENG)
• Timken (TKR)
• Goldman Sachs (GS)
• M&T Bank (MTB)
• iShares Russell 2000 (IWM)
• Spdr S&P 500 ETF (SPY)

Top 20 Holdings (by % of portfolio):

1. Quanta Services (PWR): 4.6% of portfolio
2. Bank of America (BAC) Calls: 3.7% of portfolio
3. Trinity Industries (TRN): 3.5% of portfolio
4. Thomas & Betts (TNB): 3.3% of portfolio
5. AMR Corp (AMR): 3.2% of portfolio
6. AK Steel (AKS): 3% of portfolio
7. Cliffs Natural Resources (CLF): 2.8% of portfolio
8. Navistar (NAV): 2.8% of portfolio
9. Exide Technologies (XIDE): 2.7% of portfolio
10. Shaw Group (SGR): 2.5% of portfolio
11. KBR (KBR): 2.3% of portfolio
12. Integrated Electrical Services (IESC): 2.3% of portfolio
13. Goodyear Tire & Rubber (GT): 2.1% of portfolio
14. Emcor (EME): 2% of portfolio
15. Esco Technologies (ESE): 1.9% of portfolio
16. Hexcel (HXL): 1.8% of portfolio
17. Enersys (ENS): 1.8% of portfolio
18. Graftech (GTI): 1.6% of portfolio
19. DST Systems (DST): 1.49% of portfolio
20. Citigroup (C) Calls: 1.48% of portfolio

Assets from the collective long U.S. equity, options, and note holdings were $10.6 billion last quarter and were $6.5 billion this quarter, as it saw a massive drop-off in collective assets mainly due to poor performance. It is also worth mentioning that ever since the 13F filing has come out, Tontine has been active in filing various 13D and 13G forms, which detail changes in their ownership of various companies listed above. We will also be covering these position adjustments over the next few days so that everything ties into a cohesive whole.

Tontine has also been seeking options for positions in which it is the largest shareholder, including: Miscor Group Ltd (MIGL), Broadwind Energy (BWEN), Exide Technologies (XIDE), Neenah Enterprises Inc. (NENA), Integrated Electrical Services Inc (IESC), Patrick Industries (PATK), Innospec Inc. (IOSP), and Westmoreland Coal Co. (WLB). It has had a hectic year, to say the least.

Please note that we have not detailed changes to every single position in this update, but we have covered all the major moves. Also, keep in mind that these filings only include long equity, notes, and options holdings. They do not reflect its cash, short portions, or holdings in other markets (currency, commodities, debt, foreign markets, private equity, etc.).

Overall, it's been one of the worst years ever for hedge funds, as we noted in our November hedge fund performance number update. Thus, the recent moves they've made in their portfolios become all the more interesting given the way the market has played out.

Comments

[China Expert:]

It is simply wonderful to see "arrogant" money managers come down to earth.

Jan 07 10:05 AM

[DFSX:]

Gendell is one of the smartest investors out there. Many of these holdings were beaten down by relentless shorting--not related to the fundamentals of the companies themselves, but by the perception that Tontine was having difficulties.

Rather than taking delight in that, smart "trackers" will be looking through Gendell's holdings and picking winners. There are a lot of them in there that will be scooped up by institutional investors who understand the quality of Gendell's picks as well as the complex set of circumstances which led to a miserable '08.

Jan 07 11:28 AM

[Market Folly:]

DFSX,

good point about many of the holdings being victim of relentless shorting. obviously there was some 'front running' going on in positions that suffering hedge funds like tontine and atticus were holding.

i don't think we've taken "delight" in the fact that he's performed poorly this past year. we're merely stating the facts that he is a solid investor with a solid track record who simply had an astonishing year. we simply highlighted the irony in their firm's name. even a biased reader would have to admit that it is slightly ironic.

there are definitely some winners in gendell's portfolio, you are certainly correct. however, seeing as these holdings were only as of september 30th, we believe that not all of the "fire sales" are correctly recorded yet and we will be waiting til the next 13F filing to get a better idea as to where his portfolio stands. after all, october and november are where the real pain came. but, upon quick glance, PWR and KBR certainly seem to be a good choices though. we'll wait it out though until next round to get more clarity. thanks for the comment.

Jan 07 12:28 PM