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Wellington Has Successful--But Cautious--Hedge Fund Champion

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Nick Adams of Boston-based Wellington Management oversees a hedge fund that is reported to have produced gains of 40 percent a year over the past 10 years. Small investors can also avail themselves of Adams' skills through First Financial Fund Inc., a fund that Adams has managed since it was launched in 1986.

Since May of that year, First Financial has earned an average return of 20% annually for a total return of 3,431%. S&P earned an impressive 685% over the same timeframe. Lipper Inc touts it as the best performing closed-end fund over the past five years.

The past five years have been good to small bank stocks, and First Financial has reaped the benefits. The last two years each saw a 54% gain while the previous three years saw gains ranging from 28% to 46%.

The future, however, is not as rosy. Adams declares himself a "cautiously pessimistic," when it comes to small financial stocks.  He coins this phrase even while the impressive numbers were rolling in last year. The things that keep him up at night are escalating real estate value, interest rates and the possibility of an upset to asset-backed securities.

Other investors are tossing and turning over the same issues, which explains why First Financial is down 8.5% so far in 2005.

Adams feels that the chances to make money will be dwindling. Consequently he has been revamping First Financial's portfolio to handle problems such as a yield curve that would cause short-term rates to become higher than long-term rates.

He has accomplished this by cutting back on smaller investment groups such as REITs. He has also looked to companies like UMB Financial Corp. and UnionBanCal Corp., which help curtail interest rate risks.

Adams is also eyeing investments in Canada, India, Europe and some Asian countries. A quarter of the fund's assets could possibly find their way into foreign funds five years from now.

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