10/19/2011

Losses Pile Up for Investors in Tontine Fund

It’s shaping up to be another rough year for Tontine Asset Management, a once-$7 billion firm that has struggled to regain its footing since the 2008 market rout.

The latest trouble: Tontine Capital Partners 2, the successor to a vehicle that collapsed during the financial crisis, has suffered crippling losses in recent months. Two share classes fell some 24% in August and again in September, and were down about 40% year to date, according to data the firm provided to investors.

Another share class, representing investors who stuck with the firm through the 2008 debacle, is down a whopping 86.4% year to date, including a 55.9% loss in September alone. Those shares, dubbed “Class S,” are backed by a highly concentrated position in Broadwind Energy, a penny stock that has cost Tontine dearly in the past couple of years. Broadwind, which makes wind-energy equipment, closed at 32 cents on Sept. 30, down from $2.31 at the start of the year and nearly $10 in early 2010.

In recent weeks, Tontine has notified Class-S shareholders that if they want to redeem at yearend, they’ll have to accept “payments in kind” — that is, shares of Broadwind rather than cash. The firm resorted to a similar maneuver in May 2010, when Tontine Capital Partners 2 fell 44% as a result of its holdings of Broadwind and Exide Technologies. That month, Tontine honored some redemption requests with Broadwind and Exide stock. In the end, the move may have exacerbated the fund’s losses, since the investors apparently turned around and sold the stocks — further depressing share prices.

The recent losses suffered by Tontine Capital Partners 2 have led to speculation that founder Jeffrey Gendell will likely unwind the fund — just as he shuttered earlier vehicles during the financial crisis. Over the years, Gendell has racked up impressive returns making concentrated bets on companies likely to benefit from broad macroeconomic trends. But his approach backfired in 2008, when Tontine fell roughly 85% and the firm gated investors in its three main funds: Tontine Partners, Tontine Capital Partners 1 and Tontine 25. All three vehicles subsequently were shut down.

The firm now manages about $1 billion in Tontine Capital Partners 2 and Tontine Total Return Fund. In recent months, Gendell has backed away from his strategy of taking highly concentrated positions. In September 2010, for instance, nearly 75% of Tontine Capital Partners 2’s stock holdings represented stakes of 10% or more. More recently, the portfolio of concentrated bets has been pared down to less than 40% of the fund’s overall holdings.

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