Hot Creek's hedge fund bets on banks

Maybe, David Harvey muses, it's time for his Reno-based investment fund to begin sending money back to its well-heeled investors.

Harvey's Hot Creek Capital has about $120 million invested in community banks many of them small across the country, and Harvey today sees a declining number of opportunities for the sorts of returns his investors have come to expect.

The two funds managed by the company are closed to new investment.

Working from offices in south Reno's Magnolia Village, Harvey and his team of three keep tabs on about 5,000 community banks across the country.

They're looking for underperforming banks, institutions that can be pushed into better profitability or sold.

At mid-summer, Hot Creek Capital's portfolio included investments in 69 banks, 13 thrifts, four insurance companies and one other financial institution.

In its nine-year history, the company's initial fund has produced a 1,145 percent return more than four times the NASDAQ Bank Index and a second fund launched two years ago to take long-term venture capital positions has produced a 59.36 percent return since its inception.

But identifying underperforming banks from data reported to the Federal Deposit Insurance Corp.

is the easy part of Hot Creek's work.

Because many of the bank stocks it targets are thinly traded, the bigger challenge for Hot Creek is finding stock that someone is willing to sell.

"We make a big effort to cultivate our own network of buyers and sellers of bank stock," Harvey said recently.

That network includes about 65 brokers some of whom handle only one or two stocks of hometown banks in which Hot Creek has an interest.

About 30 hedge funds similar to Hot Creek Capital chase investments in banking, and Harvey said his team's background gives it an edge when thinly traded stock is about to come on the market.

"We're bank guys," he said.

"We really like banks.We're not trading stocks."

With a background as a lender for Security Pacific National Bank and Silicon Valley Bancshares in Santa Clara, Calif., Harvey later worked in mergers and acquisitions for a New York City law firm.With $220,000 he raised from backpacking buddies and his family, he launched his first fund and loaded up with California banking stocks that been beaten up in the recession of the early 1990s.

The fund moved to Gardnerville in 1998 Harvey liked the location ever since his college hitchhiking days and then moved to Reno this summer.

"Given what we do, we can be located anywhere," Harvey said.

So why Reno? "Taxes are a big deal," he said.

Taxes are a sufficiently big deal, in fact, that Hot Creek Capital is willing to work in Reno despite some substantial drawbacks.

For one, the level of professional services legal and accounting available to fund managers in large metropolitan areas can't be found in northern Nevada.

More critically, Harvey said he's troubled by the work ethic he finds in northern Nevada.

Rather than work to develop wealth through the creation of value, he said, too many northern Nevada residents are motivated by a gaming mentality in which wealth is grabbed from the next fellow.

There's no shortage of work ethic at Hot Creek Capital, where the management team clicks on the office lights at 6 a.m.

daily.

Randall Kinoshita, a top picker of bank stocks, and James Sullivan, who handles shareholder relations, have been with the firm for about five years.

Seth Berry, who joined the fund this summer, provides more analytical horsepower.

While the company has a reputation for digging deep to find investment possibilities, it's anything but a passive investor once it buys stock.

For instance, one of the holdings of its initial fund Los Angeles-based GBC Bancorp agreed to be sold this year after Harvey and his team agitated for its sale through newspaper interviews and stern letters to the company's board of directors.

A couple of other big positions held by Hot Creek also were closed out by acquisitions earlier this year, and the company again pressured managements to sell out.

But Harvey has said that his strategy is to maximize returns, and that doesn't necessarily mean Hot Creek looks for a sale every time it makes an investment.

So long as a bank in which it owns stock produces a good return, Hot Creek Capital is content to watch its holdings grow.