Falcone's Harbinger ends 2011 with 47 pct loss

BOSTON Feb 3 (Reuters) - Hedge fund manager Philip Falcone ended an already awful 2011 with a hefty 47 percent decline in his flagship portfolio, his biggest ever, thanks to an outsized bet on startup wireless broadband company LightSquared Inc.

The billionaire trader, who soared to fame on a bet against subprime mortgages in 2007, has now crashed to earth by betting that LightSquared, a privately held company that makes up the bulk of his portfolio, could soon bring service to rural America.

Falcone told investors that his Harbinger Capital Partners LLC lost 46.6 percent last year after he dramatically marked down the value of the LightSquared holdings in the fund, an investor familiar with the matter said on Friday. A spokesman for Falcone confirmed the losses.

"The decline was primarily due to a conservative adjustment in the Fund's holdings of LightSquared, to be consistent with the results of work done by the Fund's third party valuation firm," said Harbinger spokesman Lew Phelps. "The valuation takes into account uncertainty about the outcome of political issues related to alleged interference with the GPS system by LightSquared transmitters," Phelps added.

While most managers reported year-end numbers weeks ago, Falcone only released them this week, investors said, adding that the manager often takes his time to reveal this kind of information.

The decline is hardly shocking considering that the fund had suffered double-digit losses for some time last year, investors familiar with the numbers said.

Still it makes for another high-profile embarrassment during a year already filled with other problems for Falcone.

In December the brash trader heard from regulators that he and some of his top lieutenants might face securities fraud charges. LightSquared acknowledged that it was running low on cash and it was told that its signals would conflict with the global positioning system, with uses ranging from navigation to coordinating power networks.

Earlier in 2011, Falcone's investors reacted angrily when told that if they would be given non-tradable shares of LightSquared instead of cash if they wanted to get out.

Falcone's investors have long seen sharp swings in his returns with gains of 46 percent in 2009 followed by a 12 percent loss in 2010. But this decline marks a personal low for Falcone and his decade-old fund.

The fund's assets, which had ballooned to roughly $26 billion after an astounding 116 percent gain thanks largely to the subprime bet five years ago, have now shriveled to $4 billion. LightSquared is Falcone's biggest investment.

Losses were common in the hedge fund industry last year when the average fund dropped 5 percent thanks to wild market swings as Europe's debt crisis worsened and growth was slow in the United States.

But Falcone's losses stand out as being particularly large. They also illustrate how managers can become wedded to poorly performing positions which can cost them mightily, industry analysts said. For example, hedge fund manager John Paulson's big bet on underperforming financial stocks helped shrink his Advantage Plus fund by half.

Harbinger gradually morphed from a fund that specialized in distressed debt investing to a mobile telecom incubator over the last years. And while many investors were not entirely supportive of his shift in strategy they acknowledged that LightSquared could be a huge homerun if it worked.

In the meantime though, Falcone faces many obstacles in moving the project forward, including raising fresh money for LightSquared.