Sept. 23 (Bloomberg) -- Harbinger Capital Partners Fund, run by Philip Falcone, has given up most of the 42 percent gain it posted in the first half of the year amid losses on energy and commodity stocks, according to two investors.

The hedge fund declined 12 percent this month, leaving it up about 2 percent for the year through Sept. 19, said the investors, who asked not to be identified because the information is private. Harbinger Capital Partners, a unit of Harbert Management Corp. of Birmingham, Alabama, oversees $26 billion across its funds.

``We have reduced our exposure to some of the higher volatility issuers on both the long and short sides of the portfolio,'' Falcone, 46, wrote in a report to investors at the beginning of September. ``We believe we are well positioned to withstand additional volatility in the weeks and months ahead.''

Falcone, who works from New York, was not using borrowed money at the end of August, according to the letter. The use of leverage can enhance returns and deepen losses. The fund had 52 percent of assets in long securities, or those it expected to rise in price, while 48 percent was in short investments, or those Falcone was betting would fall.

Hedge funds fell an average of about 8 percent this year through Sept. 19, according to indexes published by Chicago- based Hedge Fund Research Inc. The Standard & Poor's 500 Index has dropped 13 percent in the same period.

Marcia Horowitz, a spokeswoman for Harbinger Capital, declined to comment.

Falcone invests in companies going through corporate events like mergers and spinoffs. He started the Capital Partners fund in June 2001, and last year it returned about 115 percent. The fund has never posted a losing year. The firm also has funds that focus on emerging markets, merger arbitrage and value stocks.

Calpine, Cleveland-Cliffs

The firm's three biggest holdings as of June 30 were Calpine Corp., Cleveland-Cliffs Inc. and Freeport-McMoRan Copper & Gold Inc., according to an Aug. 14 filing with the U.S. Securities and Exchange Commission. Each has fallen about 40 percent since. The stocks accounted for about 43 percent of the fund's $13.8 billion of U.S. equity holdings, according to June 30 data compiled by Bloomberg.

Harbinger said in an SEC filing earlier this month that it had added 2.4 million shares to its position in San Jose, California-based Calpine, bringing its stake to 24.6 percent of the power producer.

Harbinger is asking shareholders for permission to increase its stake in iron-ore company Cleveland-Cliffs to as much as 33 percent from 16 percent because it opposes the Cleveland-based company's planned acquisition of coal miner Alpha Natural Resources Inc. The measure will be voted on at a special shareholder meeting on Oct. 3.

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

Last Updated: September 23, 2008 17:50 EDT