Robert Sanborn, a partner at the hedge fund Sanborn Kilcollin Partners LLC, is one of those struggling managers.

His long-term performance, based on his value-investing philosophy, tops that of the Standard & Poor's 500 Stock Index. But more recently his partnership’s Elkhorn Fund LLC has grown at a significantly slower pace than that of the S&P and Morningstar Inc.’s U.S. Equity Hedge Fund index.

The Elkhorn Fund was up 4.77 percent year-to-date when Sanborn sent out his third quarter investment letter last month. The S&P was up 19.33 percent over the same period.

“The only environment we do poor in is a buoyant environment like we have now,” admitted Sanborn. “We do well in a medium environment. We do well in a poor environment.”

In 2003, during a similarly buoyant time, Sanborn divested financial stocks, believing the companies' operations to be on shaky ground. 

“The probabilistic risks of this not ending well were growing,” said Sanborn in a recent interview. “It was the old heads-they-win, tails-we-the-shareholders-get-killed dynamic.”

Sanborn's decision to forswear financial stocks protected his investors from the sector's eventual collapse, but he missed out on two opportunities: He divested from the sector years before it would reach its peak and, despite his bearish opinions, chose not to bet against them by selling their stocks short. Shorting a stock is when an investor seeks to profit by borrowing shares and selling them, hoping to repurchase and return them at a lower price.

He continues to defend his decisions despite criticism he has received from his clients.

“The systemic risk was too high on the long side and the stocks were cheap on the short,” argued Sanborn. In other words, despite the systemic risk that he perceived, financial stocks' price/earnings ratios were low, an indication to him that the stocks weren't likely to drop, and thus were not good bets to sell short.

Although years later, as the market peak neared, shorting financial stocks would have proved lucrative, Ben Alpert, a hedge fund analyst with Morningstar Inc., said it is difficult to criticize Sanborn because “the risk of losing money is a lot greater on a short than a long.”

“Most people make their short positions when they have a target time frame, a known date,” said Alpert. “It’s hard to justify taking a short position when it might be a really long time before your theory comes to fruition.”

At the time Sanborn was avoiding financial stocks altogether, other “value" investors--those who seek solid stocks that they deem underpriced-- focused on financial service firms’ low P/E ratios and increased their investments in the sector.

“Many of these folks eschewed energy and commodities stocks as ‘too risky’ while simultaneously loading up on ‘cheap’ financial stocks,” wrote Sanborn in July 2008 as the financial sector stumbled. “Well, the jury is in, and that was delusion.”

That is not to say that Sanborn eschews short-selling completely. The fund’s poor returns this year are the result of many well-performing stocks the fund has shorted, including Amazon.com Inc., Google Inc. and Apple Inc. Despite their strong performance in 2009, Sanborn has not altered his position.

“Three great companies,” proclaimed Sanborn. “Three overvalued stocks. The higher the valuation, the more likely it is to go to its true value.”

“Our returns, year after year, are far less volatile than the S&P,” said Sanborn, who claims to be unconcerned about the fund’s recent weak returns. “We really have a long-term time horizon. Our first rule is to not lose money. Rule number two: don’t forget rule number one.”

The fund’s long-term performance supports his claim. From its inception on July 2, 2001 to Oct. 19, 2009, the Elkhorn Fund had a return of 61.4 percent. Over the same period, the S&P 500 declined 14.5 percent.

The fund’s assets under management currently hover around $150 million, down significantly from its pre-crisis, $400 million peak. Sanborn claims this is primarily because of huge withdrawals made by fund-of-funds, or funds that invest in other funds. The intensity of the withdrawals was exacerbated by the fact that, unlike some hedge funds, the Elkhorn Fund does not have any restrictions on when investors can remove their money.

“We run a liquid fund with no gates,” said Sanborn.

The funds most substantial and best performing long positions are in energy and commodities. Investments include Apache Corp., Devon Energy Corp., and Freeport McMoran Copper & Gold Inc., the fund's largest holding. Sanborn’s belief in the long-term value of energy and commodity stocks is driven by his decidedly macroeconomic view of investing.

“Demand from proto-market economies will inevitably and inexorably rise, yet prices are hardly high enough in the West to encourage meaningful conservation,” wrote Sanborn in April 2008. “In addition, more supply is coming from politically risky countries, be they in the Middle East or Nigeria or Venezuela or Russia.”

Because of the global conditions Sanborn identified, he has moved 17 percent of his long position into the energy and commodities sector. That's too much, in the view of Morningstar's Alpert.

“I wouldn’t want [the Elkhorn fund] to be a core holding,” he said. “His high conviction, high concentration style is better for the margin of a portfolio.”

The 2008 credit crisis is not the first time Sanborn’s investment beliefs have run against the grain. From 1988 to 2001, he worked at Harris Associates L.P., where he managed the Oakmark Fund from 1991 onward. At the peak of the technology bubble, Sanborn had zero percent of the fund invested in “TMT” or technology, media and telecommunications.

“I was getting a lot of flack from my shareholders and even more from some of my partners, who felt I should ‘do something,’ should make efforts to find ‘cheap growth and cheap tech,’ and that I should be less dogmatic in my approach,” wrote Sanborn in October, 2008. “Bottom line, I refused to cave and was removed as manager of the fund.”

William Nygren, the current manager of the Oakmark Fund, worked alongside Sanborn while he was at Harris Associates. Nygren would not comment on the circumstances surrounding Sanborn’s departure, but repeatedly referred to him as a “smart guy.”

“Robert shared the same intense principles of value investing that the other principals at Oakmark and Harris Associates have,” said Nygren. “None of the investors at Harris Associates were believers in the tech bubble.”

Nygren said he and Sanborn do not keep in touch.

Sanborn does not dispute that Nygren and the other principals at Harris share his commitment to value investing. The difference, he says, is the depth of that commitment.

“There are many investors who have the same philosophy,” said Sanborn. “The difference with us is we will execute it come hell or high water. Even professionals with value philosophies tend to be momentum investors at the end of the day.”

“He comes off as very opinionated and strong-willed,” said Alpert. “Which can be a strength or a weakness. It comes out in his investment portfolio.”