Bruce Berkowitz, Low Returns, High Redemptions and ‘Average Down’

Bruce Berkowitz has had an amazing track record. For years, his Fairholme Fund has produced consistently high returns. Of course, with the sweet comes the sour – no one gets it right every time and Berkowitz is no exception.

Bruce Berkowitz’s Fairholme Fund in 2011

After investors in Bruce Berkowitz’s Fairholme Fund lost almost 25% of their investments, they withdrew almost $6 billion from the fund since the start of the year, dropping the Fairholme Fund portfolio from $20 billion to just over $13 billion. Why the influx? Investors who sell can claim their losses, offsetting tax burdens. There is also the issue that Berkowitz has roughly 75% of his fund invested in financial stocks, leaving some investors to opt to invest in an exchange-traded fund and save the high fees associated with hedge funds. Also, Berkowitz has been losing key staff. He lost two co-managers in 2008 and, more recently, Charles Fernandez.

Bruce Berkowitz’s Investment Strategy

Bruce Berkowitz has been emphasizing that having a large volume of cash in the fund is essential to his strategy. Now that so many redemptions have come in, the amount of cash in the Fairholme Fund has shrunk considerably. The Wall Street Journal reports, “The fund has gone from 25% cash in February to low single digits.” The Wall Street Journal notes that he has “often taken big positions in stocks only to see them fall sharply in price.” The same column ask questioned Berkowitz’s strategy of “using massive inflows of new investor money to ‘average down’ the acquisition cost of stocks which fell after he took a stake.” It explained that any “advantage would disappear should the inflow of cash dry up. And, if investors started pulling money out of the fund, it could be forced to sell some shares at a loss.”