SPECIAL REPORT-SAC has a reverse Midas touch with spinoffs

* Some hedge funds that got money from SAC have flopped

* Other industry superstars do better with their spawn

* Some investors blame SAC trading culture for failures

By Svea Herbst-Bayliss and Matthew Goldstein

BOSTON/NEW YORK, Dec 14 (Reuters) - If you are starting a hedge fund, the easiest way to gain an edge is to secure an initial investment from an industry superstar who is also your former boss.

Money from Julian Robertson, George Soros or even Harvard Management has long been considered a seal of approval that can make pension funds and endowments take notice of a newcomer. And many such funds, from Lone Pine Capital to Blue Ridge Capital to Highfields Capital, have gone on to greatness, doing their forebears proud.

But when it comes to spinoffs, Steven A. Cohen's SAC Capital Advisors has produced a surprisingly consistent string of duds.

Funding from Cohen, who oversees $12.9 billion, is particularly rare, bestowed on only a few of the hundreds of traders and portfolio managers who have worked for the billionaire investor over his firm's 17-year lifespan.

As selective as Cohen has been, many of the portfolio managers who have spun out of SAC with a financial boost from their old employer over the past half-dozen years have either shut down completely or have seen so much money leave that they stopped reporting their data to would-be investors, industry analysts and investors said.

"You would think that the records of people who spin out of SAC should be better," said one investor who has money with one of the firm's spinoffs and has watched the progress of many others.

"These people worked for one of the world's most consistently profitable hedge funds, and when some of them flop it makes you wonder what happened," said the investor, who asked not to be named because the investments are private.

Although no statistics exist, some investors and industry consultants say SAC spinouts fail more often than those of other big firms.

THE SAC WAY

Why do so many former top SAC traders have such a hard time replicating their feats after striking out on their own? One possible answer, according to these industry analysts and investors, is the way Cohen runs the firm.

"The biggest difference between spinning out of SAC and some of the other big hedge funds probably is that at SAC you were paid to be a top-notch trader and you didn't learn how to set up a business," said a person who asked not to be named because he is currently considering putting money with some SAC spinoffs.

Another potential explanation is that without a big supporting cast of analysts and assistant traders around them, a one-time star trader at SAC can look a lot more ordinary if he has to research stocks himself. But that would seem to apply to the progeny of other big firms as well.

The most recent example of a Cohen disciple falling down is Forrest Fontana, who left Cohen's Stamford, Connecticut-based SAC to set up his own firm in 2005.

Initial buzz about Fontana Capital, which invests mainly in financial stocks, was strong. Boasting a business degree from Columbia University, stints at Boston-based mutual fund giants Putnam Investments and Fidelity Investments, and a $50 million initial investment from Cohen, Fontana quickly saw his new firm grow to $325 million by November 2006.

But sometime in 2007, Cohen pulled out SAC's money. And by March 1, 2009, Fontana's fund's assets had shrunk to $16.1 million, despite losing only 7.69 percent last year, far less than the Standard & Poor's Financials Index 57 percent loss.

Fontana told his neighbors in March that he managed his own "successful investment" firm when he campaigned for and won a seat as selectman in Winchester, a wealthy suburb north of Boston. At the same time, Fontana abruptly stopped sending his performance reports to potential investors, several said, sparking talk that Fontana Capital was going out of business, with Fontana himself possibly returning to SAC.

Late last month, Fontana was still at work in a corner of his fund firm's largely empty office in Boston's financial district. He declined to answer questions about the firm's or his own professional future.

SUCCESSFUL SPAWN

A succession of people who worked for Julian Robertson and then received money from him to build their own businesses now rank among the world's most prominent hedge fund firms: Andreas Halvorsen's Viking Global Investors, Steven Mandel's Lone Pine Capital and Lee Ainslie's Maverick Capital.

Stanley Druckenmiller, a key player in George Soros' famous bet against the British pound that earned him $1 billion, now runs his own successful fund, Duquesne Capital Management.

Richard Perry, a protege of former Treasury Secretary and Goldman Sachs executive Robert Rubin, and Paul Leff, a former Harvard Management Co executive, co-founded still thriving Perry Capital.

And Jack Meyer, who helped quadruple Harvard's endowment in 15 years as head of the university's investment arm, continued to manage money for the school when he set up Convexity Capital Management, the biggest new hedge fund ever, launched with $6 billion.