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Berkowitz's no-hedge hedge fund up 33%

For years, Fairholme Capital Management's Bruce Berkowitz was known as the mutual fund manager who acted like a hedge fund activist.

Big and volatile, the Miami-based fund took large positions in companies like real estate developer St. Joe Co., financial giant American International Group and international banking group Bank of America and then pushed for change.

A year ago, Berkowitz formally attempted to manage both a hedge and mutual fund simultaneously. He launched the Fairholme Partnership, a private version of his Fairholme fund with $22 million of his and other employee capital. The hope, he said when opening to outside investors in October, was to raise a billion dollars in a year. It would be a smaller complement to his $11 billion mutual fund using some of the tools his public fund could not.

Now a year old, the equity and bond-focused fund doesn't have a billion dollars—it managed $206 million as of Jan. 1—but is up from $140 million in October.

While the new vehicle is technically a hedge fund, it doesn't act like one. The average net market exposure was 100 percent over 2013; the fund does not short, or bet against the market. A more typical hedge fund net exposure is about 20 percent, meaning long bets only slightly outweigh shorts.

Fairholme Fund return over 10-years

Its performance has been in line with the U.S. stock market: up 33 percent returns net of fees in 2013. The Absolute Return Event Driven Index, which tracks other hedge funds that also attempt to play changes at companies, gained 14.51 percent by comparison.

Berkowitz's hedge fund returns still lag his mutual fund: Fairholme gained 34.75 percent net of fees in 2013 with most of its capital in six positions: AIG, Bank of America, Sears Holdings Corp., St. Joe, Leucadia National Corp. and Fannie Mae.

(Read more: US rejects Fairholme plan to recapitalize Fannie, Freddie)

The Fairholme hedge fund has an unusual fee structure and terms.

First, it requires a $5 million minimum investment, higher than the usual $1 million for other funds. Then, there's no management fee; most hedge funds charge 2 percent of all assets.

For the performance fee—usually 20 percent—investors are offered three options: a five-year "lock-up" during which money cannot be redeemed with a 15 percent performance fee; a three-year lock with a 20 percent fee; or a one-year lock with a 25 percent fee. Most hedge funds have a one-year lock.

"It's admirable that there's no management fee so that Bruce's incentives are aligned with investors. That said, we are typically seeing new hedge funds with management and performance fees of 1.5 percent and 15 percent with one-year locks," said Michael Oliver Weinberg, a hedge fund expert who teaches at Columbia Business School.

A spokesman for Berkowitz declined to comment beyond a news release announcing the hedge fund returns.

(Read more: Fairholme proposes to buy insurance businesses of Fannie, Freddie)

In 2010, Berkowitz was selected as Morningstar's Domestic-Stock Fund Manager of the Decade. But Fairholme promptly tumbled, falling 32.4 percent in 2011 because of bets on AIG, Bank of America and others. Those ideas were eventually proven correct, albeit too early: The fund gained 35.8 percent in 2012. Today, the mutual fund has a three-of-five-star rating from Morningstar, meaning its performance is average for its category since inception.

In 2011, Berkowitz deputy Charlie Fernandez abruptly left Fairholme. In 2012, he formed his own hedge fund firm, Barnstar Opportunities. The fund formally launched in May 2013. Performance and asset information were not immediately available. Barnstar president Charles Friedberg declined to comment.

—By CNBC's Lawrence Delevingne. Follow him on Twitter @ldelevingne.

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