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Street Sleuth
When Even Stock Stars Get Clipped
Demise of Lyceum Capital
Shows Mutual-Fund Skills Can Fail in Hedge World



February 10, 2005; Page C3

Another small hedge fund has died, fueling a debate about whether star stock pickers from the mutual-fund industry make the best candidates to run one of these sophisticated, largely unregulated investment vehicles.

Lyceum Capital manager John Muresianu is winding down his fund only 28 months after starting it. Mr. Muresianu decided to call it quits after Lyceum, which mainly held technology stocks, suffered a particularly poor January. At the end of December the fund had $112 million in its coffers, just a few million dollars more than when it launched in October 2002 with cash from wealthy families and institutions. Based in Concord, Mass., Lyceum never really hit its stride. It got off to a poor start with losses in eight of its first nine months, and then swings in either direction in subsequent months. Mr. Muresianu says the stock picks that helped clients last year, such as eBay Inc., hurt them in January.

"I had a grand vision of creating an institution that would survive me," Mr. Muresianu says. "But I bit off more than I could chew. To manage money is stressful. To manage money and to manage people is even more stressful. And if you are underwater for much of the time, it is also very stressful."

Mutual-fund managers who start hedge funds often find themselves dealing with different investment tools as well as clients who demand performance for the fees they pay, typically as much as 2% of a fund's assets and 20% of its profit. Then there is the matter of running a business in addition to running the portfolio.

"Running money is one thing, but running a firm [and] doing the marketing is an entirely different thing," says Jacob Schmidt, director of global hedge-fund ratings at Allenbridge Hedgeinfo, a London research firm.

Mr. Muresianu was previously a high-profile fund manager at Boston's Fidelity Investments. Yet some in the industry had been skeptical of Mr. Muresianu's chances from the get-go. "He thought he could actively time the direction of the market, which is difficult to do," says Charles McNally, a managing director of Lyster Watson & Co., which invests in hedge funds on behalf of its clients. Mr. McNally says he decided not to steer clients to Mr. Muresianu, citing the fund's volatile performance.

To be sure, Mr. Muresianu's fund was a far cry from the billion-dollar behemoths whose failures grab headlines -- and that may have contributed to its demise. Smaller hedge funds lack the assets and clout that help convince investors to stick with them during lean years. Many fail.

Yet hedge-fund launches still wildly outpace closures: Last year, 1,406 funds were launched, according to Chicago's Hedge Fund Research Inc., while 267 liquidated. The message, industry critics say, is that it still is easy to set up a fund.

After a short career in academia, Mr. Muresianu worked as a currency trader for Bank of Boston for two years and then joined Fidelity as an equity analyst in 1986. In 1993, he was made the portfolio manager for the Fidelity Utilities Fund and later the Fidelity Fifty Fund. He was a good stock picker. During his helm of Fidelity Fifty, from January 1999 to June 2002, he delivered an average annual return of more than 9%, compared with a 4% loss in the Standard & Poor's 500-stock index during the same period.

"I am surprised that his fund hasn't worked," Christopher Traulsen, senior fund analyst at Chicago fund researcher Morningstar, says of Mr. Muresianu. "At Fidelity, he was a maverick. He ran a very concentrated portfolio. He had these bets in place that were aggressive but tempered with a large cash stake."

Too large a cash stake: By 2002, the portfolio of the $2 billion Fidelity Fifty held 30% in cash, more than three times the limit Fidelity allows. Mr. Muresianu quit amid pressure from upper management to put more cash into stocks and started Lyceum. Mr. Muresianu, who holds a doctorate in history from Harvard University, previously had compared the Internet boom to the rise of radio in the 1920s, an analogy that put him into dot-com stocks early and profitably. But when he started Lyceum he shorted the market -- something he couldn't do at Fidelity, as most mutual funds aren't allowed to make these bearish bets -- and got walloped. To some observers, that mistake demonstrated the folly of assuming strong stock pickers from the mutual-fund industry will be great hedge-fund managers.

"We shy away from managers coming out of mutual funds," says Charles Gradante, managing principal of Hennessee Group, a hedge-fund adviser. "We like managers coming out of Wall Street" who have more experience with financial instruments such as derivatives.

"You have mutual-fund managers that leave the industry to get into a hedge fund, and they're out of the business as soon as they're in it," adds Joseph Omansky, president of Sky Fund, a hedge-fund research group based in New Brunswick, N.J. Hedge funds are "much more statistical [than mutual funds]."

The industry is littered with failures by former mutual-fund managers. James Otness, a fund manager with J.P. Morgan Chase & Co., left in 1998 to start Dolphin Asset Management, which failed in 2000. Spheric Capital Management, started by Erin Sullivan, another star stock picker from Fidelity, faded from the scene amid the turbulent 2001 market.

A notable exception is hedge-fund manager Jeffery Vinik, who left Fidelity's flagship Magellan Fund in 1996. After several years of outsized returns in the hedge fund he started, he closed shop in 2000, returning $4.2 billion to clients.
"You have mutual-fund managers that leave the industry to get into a hedge fund, and they're out of the business as soon as they're in it," adds Joseph Omansky, president of Sky Fund, a hedge-fund research group based in New Brunswick, N.J. Hedge funds are "much more statistical [than mutual funds]."

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