Icahn hedge funds post first loss since inception

Billionaire Carl Icahn's activist hedge funds posted their first quarterly decline since they opened three years ago because of volatile markets and losses on stocks including WCI Communities Inc and Lear Corp.

The funds, run by New York-based Icahn Capital Management LP, together fell 1.5 percent in the third quarter, according to a regulatory filing on Friday. The firm reversed more than $27 million of incentive fees as a result of the drop, according to the filing by Icahn Enterprises LP, parent of the fund-management business.

Results included $51.5 million of losses from WCI, the Bonita Springs, Florida, homebuilder that Icahn unsuccessfully sought to acquire in February. The funds had a $33.7 million loss on their investment in Lear, the Southfield, Michigan-based manufacturer of automotive seats that also rejected a buyout offer from Icahn.

Returns were "impacted by volatile market conditions as well as equity positions related to consumer, real estate and financial sectors that represented losses for the quarter", Icahn said in the filing with the US Securities and Exchange Commission. The Standard & Poor's 500 Index rose 1.6 percent in the quarter, reversing a loss that was as much as 6.4 percent on August 15 amid credit-market turmoil.

Icahn buys stock in companies that he deems undervalued, which have included Time Warner Inc to Motorola Inc, then pushes management to take steps to boost share prices. Since starting in November 2004, the Icahn funds have risen an average of 25.8 percent a year through this year's third quarter.

The Icahn funds had net realized and unrealized losses on investments, including derivative contracts, of $133.7 million, according to the filing. That compared with gains of $209.3 million a year earlier.

Even with the third quarter loss, the funds gained 19.8 percent on a gross basis in the first 10 months of the year, the filing said. Profit was "largely driven" by stakes in biotechnology and energy companies such as Biogen Inc and Williams Cos. Gains also came from a bet spreads between yields on junk bonds and the London Interbank Offered Rate, or Libor, would increase.

Icahn, 71, declined to comment. His management company charges an annual fee equaling 2.5 percent of fee-paying capital and also receives 25 percent of net profits generated by the hedge funds.

As of September 30, the funds had $7.1 billion in capital under management, including $5.1 billion that paid fees. Icahn Enterprises, Icahn himself, and other members of management don't pay fees on the money they have invested in the funds.

Icahn Enterprises, formerly American Real Estate Partners LP, is the financier's publicly traded holding company for his real estate, investment-management and home-linens operations. The holding company acquired Icahn's hedge-fund business in August.

Bloomberg News

(China Daily 11/14/2007 page16)