Pequot small-cap hedge fund, team to spin off

By Joseph A. Giannone

NEW YORK (Reuters) - Pequot Capital Management Inc's $350 million small-cap hedge fund, the Pequot Scout Fund, and its management team are preparing to spin off into an independent firm starting July 1, investors familiar with the plan told Reuters on Thursday.

Led by 15-year veteran Mark Broach, Scout's 10-person team has been preparing to separate for about six months as Pequot, led by investor Arthur Samberg, looked at honing the firm's focus on certain markets. The spin-off, these investors said, is unrelated to the big hedge fund's announcement Wednesday that it was shutting down after 22 years.

The new firm will be called Manatuck Hill Partners and will continue to use the Scout name, said the investors, citing a letter from Broach sent out Thursday. The new firm will be based in Westport, Connecticut.

Most Scout investors have agreed to stick with the fund and the entire portfolio will be transferred with the investment team. As a result, no portfolio positions are expected to be sold, the investors said.

Samberg, one of the best-known managers in the hedge fund industry, told investors Wednesday the firm is shutting down after 22 years because the U.S. government reopened an insider trading probe. Samberg and Pequot have long denied allegations of insider trading.

Pequot's assets under management have shrunk from $15 billion to around $3 billion in recent years, driven in large part by the overhang of the on-and-off probes.

Samberg, 68, in his letter Wednesday told investors that the firm will spin off two other portfolios: Pequot's Matawin mortgage-focused fund and the Special Opportunities fund. Both are expected to be independent before the end of this year.

Pequot said it will liquidate its flagship "Core" funds. Investors in these funds will begin to get their money back by the end of next month.

(Reporting by Joseph A. Giannone; Editing by Tim Dobbyn and Matthew Lewis)