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Karsch's still unnamed firm will be based in the same office as his old KCM, space he kept for his personal business endeavors. Karsch is currently interviewing people for positions at the hedge-fund firm, which will again focus on investing in stocks.
The strategy will be similar to before: Karsch's expertise is in consumer and retail companies, along with "TMT," which stands for technology, media and telecommunications. While the focus will be on equities, the new fund will have a slightly broader mandate, such as the ability to invest in distressed bonds should the opportunity arise.
It already has about $300 million in commitments, according to a person familiar with the situation, with a substantial allocation from Karsch.
Michele Gesualdi, a hedge fund investor with Kairos Investment Management in London, said the move was unusual.
"It is certainly a contrarian decision," Gesualdi wrote in an email.
He said successful, long-established managers tend to transform their firms into family offices to remove themselves from the scrutiny of investors and the red tape of running a business. Examples include George Soros, Stan Druckenmiller and Chris Shumway.
Gesualdi added the road back can be difficult, even for established investors.
"Importantly we found that in some instances it has been a struggle for some managers to come back, as the intensity of markets has severely increased as of late and adjusting to a new environment can be extremely challenging," he said.
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Karsch says he always planned to come back to hedge funds, but needed to take a break after essentially looking at stocks seven days a week for 18 years. As KCM grew, Karsch said he spent more time on firm management as opposed to his passion of picking businesses to invest in.
"It felt like a struggle for several years," Karsch said of running KCM, which fell to $1.8 billion in assets in 2013. "The business didn't really reflect what I enjoy doing the most in the business and what I do best."
Over the 13-year life of the fund, KCM produced annualized returns of 7.5 percent, compared with 3 percent for the S&P 500 index. The fund only lost money two years: It fell less than one percent in 2008 and 2 percent in 2011. While the performance was strong, Karsch said he was "frustrated" by his returns in the bull market after the financial crisis.