Hey TAP, the jigg is up-->Blue Water Surged on Tiny Stock That May Yet Leave It Adrift
New York, May 13 (Bloomberg) -- Blue Water's funds returned 140 percent as the top-performers among hedge funds in the first quarter -- but they're unlikely to retain that lofty pinnacle.
The three funds, which mirror the same investing strategy, owed much of their gain to one stock -- NetSol International Inc., a money-losing software developer that soared 249 percent in the quarter.
On Friday, however, NetSol fell 8 to 38 after reporting a loss of $797,603, or 8 cents a share, for the quarter ended March 31, compared with the year-earlier period's loss of $174,000 or 6 cents a share. The stock has shed almost half its value since reaching a high of 75 on March 3.
Blue Water, run by money manager Jonathan Iseson, as of May 1 had about two-thirds of its $160 million in net assets invested in NetSol. The fund's most recent filing with the Securities and Exchange Commission indicates it owns 24.8 percent of NetSol.
NetSol's performance in the first quarter ``helped us a lot,'' said Iseson, though ``it's not something we want any publicity on.''
Iseson, a 43-year-old former trader at investment bankers Keefe, Bruyette, & Woods, was reluctant to discuss his portfolio's makeup but -- a few days before NetSol's quarterly results -- sounded confident about the Calabasas, California- based company.
Risk
``It's a company coming out of infancy and getting credibility,'' said Iseson.
Still, placing a large investment in a fledgling company makes for ``a very high level of risk, involving both a lack of diversification and a lack of liquidity,'' said John Coffee, professor of securities law at Columbia University Law School. ``Effectively all their eggs are in one basket.''
``It makes me uncomfortable,'' said San Francisco money manager Gary Marks, whose investment with Blue Water is now worth $2 million, though he's pleased because ``I've never made 140 percent in three months.''
In beating second-place Galleon Omni Technology (up 115 percent) and third-best Polaris Prime Europe (up 101 percent), Iseson said he's balanced the risk of his large position in NetSol with a ``proprietary'' hedging technique, on which he wouldn't elaborate.
``We are hedged and will make a lot of money in the future,'' said Iseson, who works with ``four or five'' computer screens out of a 400-square-foot trading room in his Manhasset, Long Island, home.
Blue Water's total portfolio, including both long and short positions, was leveraged to $330 million, Iseson said, so NetSol accounts for just 32 percent of total holdings.
NetSol's Shift
NetSol, then known as Mirage Holdings Inc., went public in 1998 as an importer of exotic clothing from Pakistan. The business soon soured and it bought a software company from the chief executive's brother, Salim Ghauri, and changed its name. About three-quarters of its 290 employees work in Pakistan.
Salim Ghauri became chief executive after the acquisition. His brother Najeeb Ghauri now is NetSol's president while another brother, Naeem Ghauri, is chief operations officer.
The company writes software for clients around the world, including Daimler Chrysler Taiwan, and its Pakistani software engineers are said to be paid 90 percent less than U.S. counterparts. ``They're a low-cost producer in a high-growth business,'' said Iseson.
NetSol isn't followed by any Wall Street analysts but two research reports were issued on the company last year. A ''buy'' recommendation in March was followed by a ``strong buy'' in June from independent analyst Howard Stillman of Stillman Equity Research in San Diego. He said he was paid $4,000 for each report by NetSol.
Blue Water, backed by 80 wealthy investors, opened in February 1999 and along the way took positions in Chase Manhattan Corp., MetLife Inc., and brokers Morgan Keegan Inc., among others.
Aggressive
Iseson began purchasing NetSol last year and owned 7.4 percent of the stock by August, according to his filing with the Securities and Exchange Commission, when shares were trading at around $7. In its most recent SEC filing this week, Blue Water reported paying $43.1 million for its 2.1 million NetSol shares, an average of about $20.50 a share for its 24.8 percent stake.
Only about 14 percent, or 1.3 million of NetSol's 9.6 million shares remain in the public float. In addition to Blue Water 2.1 million shares, NetSol's officers and directors own 5.1 million.
Like other hedge funds, Blue Water invests more aggressively than mutual funds, as demonstrated by its NetSol bet. Iseson, who said he used personal funds for about 10 percent of Blue Water's initial capital, pays himself 20 percent of the fund's quarterly profits.
The details of Blue Water's other holdings aren't known because hedge funds, unlike mutual funds, aren't required to file quarterly reports with the SEC disclosing where they place investors' money.
Blue Water's ranking was tabulated by MAR/Hedge, a unit of Metal Bulletin Plc, which tracks the performance of more than 1,300 hedge funds. Unlike some funds, Blue Water has no limits on how much money it invests in any one security and investors must leave money in the fund at least 12 months before making any withdrawals.
Iseson says he's not worried about his fund's liquidity nor that of his NetSol shares, which he says ``will go two or three times higher.''
``I believe when the time comes, we will be able to do what we have to do,'' he said. ``The exit strategy will present itself when it's appropriate.''
May/13/2000 18:48 GMT
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