Unfazed by a flat first half for his $20 million hedge fund and a recent selloff in the thrift sector, David Rochester thinks the fund can achieve 25% growth for the year by pouring more money into thrifts.

That would be a stunning comeback and a step toward recapturing the glory of 1997, when the fund, Aldie Partners, boasted 97% growth.

Mr. Rochester, a former visiting scholar to the Federal Home Loan Bank Board and onetime economist with the Federal Savings and Loan Insurance Corp., acknowledges that it will not be easy.

Thrift stocks are not usually stellar performers, even in up markets. They trade at a 20% discount to commercial bank shares, which in turn average about 70% of the value of the Standard & Poor's 500.

During the past month, when all stocks were trounced, thrift shares suffered their steepest 30-day fall so far this decade.

"It isn't an easy time" to manage a hedge fund, especially one that invests mostly in thrifts, Mr. Rochester said in a recent interview.

Indeed, the market's gyrations make it difficult for even mainstream fund managers to prosper. With hedge funds, the market's peaks and valleys can steepen when the use of options, short sales, futures, and other special techniques backfire.

At the same time many general fund managers continue to shun financial institution shares, feeling they can do better betting on other industry segments.

"That really dries up the liquidity," Mr. Rochester said.

But Mr. Rochester said he is taking the long view. He manages the two- year-old fund with his wife, Catherine, a former banker. And their Washington company, Capital Resources, also advises thrifts on mergers and acquisitions.

Mr. Rochester said the M&A business is kept separate from the fund. "If we advise a thrift that we have also invested in, that account is automatically frozen," he said.

In general, thrifts are attractive as stocks because there is so much industry consolidation going on, Mr. Rochester said. The institutions make ideal targets for community banks that want to expand their products' reach. Also, management often has a substantial ownership stake, an incentive to want the best for the institution.

And year-2000 expenses should be minimal, because most thrifts, instead of using in-house systems, contract out for services, Mr. Rochester said.

His fund holds stock in about 30 thrifts. Its largest holding is in Washington Mutual. Shares of the Seattle company have taken a hammering this year, but it is nonetheless one of the industry's most highly regarded thrifts.

Among larger thrifts, Mr. Rochester also favors Astoria Financial Corp. and Roslyn Bancorp, both of which are in expansion modes.

Some commercial banks' shares have found their way into the fund because they have demonstrated integration prowess. He places in this group Banc One Corp. and Mercantile Bancorp.

Mostly, though, Mr. Rochester said he sticks to smaller thrifts, with $1 billion or less in market capitalization. Hawthorne Financial Corp. is among his leading choices. The California thrift "is truly a turnaround story," whose income is being enhanced by expansion into nonconforming lending, Mr. Rochester said.

Near-term, there may be a bit more pain in the market, Mr. Rochester acknowledged. But he also echoes the sentiments of many veteran investors by saying, "Long-term, the selloff represents a buying opportunity."

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