Dec. 23 (Bloomberg) -- Jeffrey Gendell, whose investment firm Tontine Associates LLC is liquidating two hedge funds after losses of more than 60 percent this year, plans to start a new fund in February.

The Tontine Total Return Fund will invest in stocks believed to be undervalued and won’t use borrowed money, Gendell said in a letter to investors. Steve Bruce, a spokesman for Greenwich, Connecticut-based Tontine, declined to comment.

Tontine, started by Gendell 12 years ago, had been one of the industry’s best performers, with its four funds returning an average of 38 percent annually since inception through 2007. The firm last month said it was unwinding Tontine Capital Partners LP, a fund that plunged 77 percent this year through October, and Tontine Partners LP, which fell 67 percent through September.

“I would be very surprised if people allocated new capital with him after such losses,” said Graziano Lusenti, founder of Nyon, Switzerland-based Lusenti Partners LLC, an investment adviser.

Gendell isn’t the first to seek investments for new funds after losing money for clients. Nicholas Maounis, whose hedge- fund firm Amaranth Advisors LLC collapsed under a record $6.6 billion loss in 2006, started a new fund in October.

Tontine said existing clients who choose to invest in the new fund will pay a management fee of 1 percent and won’t be charged an incentive fee until their losses are recouped.

New investors will be charged fees of 1 percent of assets and 20 percent of investment gains, compared with the industry- standard of 2 percent of assets and 20 percent of profits.

‘Old-Fashioned’ Investing

“We believe old-fashioned stock picking will return to the forefront and the next several years will bring extraordinary investment opportunities,” Gendell said in the Dec. 9 letter, a copy of which was obtained by Bloomberg News.

Hedge funds are private, largely unregulated pools of capital. They are reeling from the worst financial crisis since the Great Depression, losing an average of 18 percent this year through November, according to data compiled by Hedge Fund Research Inc. Equity hedge funds have slumped 26 percent this year, the Chicago-based research firm said.

Gendell, a former sports reporter for the Associated Press, previously worked as head of stock investing at Odyssey Partners LP, an early hedge fund started by the late Jack Nash whose alumni include John Paulson of Paulson & Co.

To contact the reporters on this story: Saijel Kishan in New York at skishan@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net

Last Updated: December 23, 2008 14:58 EST