Red Sox owner and hedge fund guru John Henry blamed himself when hotshot GM Theo Epstein quit. But letting Theo come back could be an even bigger blunder.

(FORTUNE Magazine) – BOSTON RED SOX owner John W. Henry regretted the remark almost the moment it escaped his lips. Public self-doubt is as rare in major-league sports as it is in bigtime business, and Henry had turned a Nov. 2 press conference on the team's failure to re-sign Theo Epstein--the young general manager credited with exorcising the Curse of the Bambino and bringing deliverance in the form of a World Series triumph--into an anguished act of self-flagellation. "This is a great, great loss. I hold myself wholly responsible," Henry whispered in a Fenway Park meeting room packed with 200 bloodthirsty media types. Then came the kicker: "I have to ask myself--maybe I'm not fit to be the principal owner of the Boston Red Sox."

The only thing stranger than Henry's confession was its tone. A hedge fund whiz who achieved fantastic wealth by trusting computer models to trade currencies and commodities, the introspective and reserved Henry generally views human emotion as the bane of sound decision-making. Yet there he was, misting up and saving himself from tears only with a mawkish movie quote, "There's no crying in baseball." Henry continued: "I had this romantic notion Theo was going to be our general manager for the rest of my life. Never in my wildest dreams did I think this would ever happen." He shouldn't have been surprised when a next-day headline blared HAS JOHN HENRY LOST HIS GRIP ON THE SOX?

For once, the overheated Boston press was asking the right question. By his own admission, the owner had allowed a critical management process to spin out of control. As a result, Henry had lost the man hailed for assembling the first Red Sox championship team in 86 years. The ultimate systems guy had trusted the system--and it had blown up in his face. Most agreed that the result would have been different had Henry relied on himself rather than his hierarchy. As Red Sox star Curt Schilling put it in an e-mail to FORTUNE: "In my opinion, had Mr. Henry handled the negotiations, Theo would still be the GM." But Mr. Henry hadn't, and Theo wasn't.

How did Henry let the Epstein situation get out of control? On one level, it's an age-old reminder of the perils of hands-off management and, more significant, the dangers of ignoring clear indications of looming trouble. On another, it's a reminder of the conflict that can result when a protégé bridles under a mentor. Finally, it's an object lesson in how not to retain a valued employee.

What makes those classic themes stand out in sharpest relief is the backdrop--not so much baseball as the media-saturated environment in which it took place, where leaks are endemic and every remark or gesture is dissected by the press and millions of fans. So volatile is the hothouse atmosphere of Red Sox Nation that a mere week after Epstein's departure press conference, the rumor wire started buzzing that Epstein would return. It's not impossible. Henry still pines for his old GM, so the story may have a happy ending. However it concludes, the Red Sox have been battered by bad press, hamstrung without a GM during baseball's trading season, and riven with turmoil. What's easy to miss is that those problems far exceed the damage from losing Epstein. They reveal a paradox: It may have been a mistake to let Epstein leave, but it could be an even bigger one to bring him back.

I FIRST MET JOHN HENRY in 2002, and it was immediately apparent that he is not your typical market whiz. In 20-plus years at the helm of his Boca Raton hedge fund firm, John W. Henry & Co., the soft-spoken Henry had made billions of dollars for investors by trading everything from gold to energy futures. Yet when I asked him where he thought the dollar was headed or what the future held for oil, his answer was always the same: a placid "I don't know."

Henry, you see, is the rare money manager who doesn't purport to be an expert in the assets he trades. In fact, he thinks such expertise is counterproductive. What he is, he'll tell you, is a student of human nature--or, more specifically, of how human behavior drives financial markets. Early in his career he combed through decades upon decades of market data, distilling pricing trends into mathematical models that gauge when to follow the Wall Street herd and when to zig if the frightened masses zag. "Actual data," Henry would tell me, "means more than individual perception or belief."

Now 56, Henry is a lifelong baseball fan. The son of an Illinois farmer, he came to love statistics as a kid, calculating the batting averages of Stan Musial and his other hardball heroes. So perhaps it's little surprise that, when Henry purchased the Red Sox in 2002 for $700 million with television mogul Tom Werner and Larry Lucchino (who now functions as the organization's CEO), he decided to employ the nouveau philosophy now known to the outside world as Moneyball, after the book that chronicled its famous proponent, Oakland A's GM Billy Beane. In simple terms, it involves eschewing traditional baseball metrics and qualitative judgments in favor of newer statistical measures that better gauge the way games are actually won.

Henry hired a cadre of baseball number crunchers--among them author Bill James, baseball's best-known statistical muckraker--and gave them the task of testing baseball's hoary conventional wisdoms against the cold, hard facts of performance. Henry opined that the best way to improve a team was to "take away the manager's bias and replace it with what actually works." And so, for example, the Red Sox dumped manager Grady Little, who had committed the sin of allowing Pedro Martinez to pitch past the statistical danger point in the Sox's bitter 2003 American League championship loss to the hated New York Yankees.

Leading the front office's disparate mix of analysts and post-modern baseball men was Epstein, then a tender 28. He was the brainy (but dashing) Boston native whom the even brainier Henry had plucked from obscurity to be the team's general manager. Epstein was initially derided by baseball lifers, many of them middle-aged former minor-leaguers, who viewed the Yale-educated lawyer as an interloper. But the World Series win two years later transformed him into Beantown's favorite son.

Yet only a year after spraying champagne in a championship locker room, Epstein spurned a reported three-year, $4.5 million contract offer and walked out. Epstein offered only evasive platitudes as explanation at his press conference. "The way I am, to do this job you have to believe in every aspect of the job," Epstein told a frustrated Boston press corps. "There's personal reflection about a lot of issues, and in the end I determined it was the right thing for me not to return." Epstein insisted that his much dissected, 14-year relationship with Lucchino was not the problem. Yet moments later, Epstein grimaced when Henry insisted there had been no "trust issue" between Epstein and Lucchino.

Was that a telling slip? Epstein won't say--he did not respond to numerous e-mails and phone calls seeking comment. Nevertheless, Henry wasn't surprised when told of Epstein's body language. "There was a trust issue, and after I read through the transcript, I realized I should have just said, 'No comment,'" he concedes. "But I was trying to be very careful about not giving away his reasons. I felt like that's up to Theo."

HENRY'S BELIEF in the certainty of numbers gives him a detached negotiating style. One of his former hedge fund employees recalls that when it came time to haggle over raises, Henry took a clinical approach: "His message was basically, 'I think you're worth X, but if you feel you're worth more, you're welcome to test the market."

At the same time, Henry has always been a delegator--and he has plenty of reason to put his faith in Lucchino, whom he calls "the best CEO in sports." Lucchino, after all, has excelled at finding lucrative new sources of revenue. And it was Lucchino who groomed Epstein, taking the youngster with him from the Baltimore Orioles to the San Diego Padres and then to the Red Sox. Quite simply, without Lucchino, Epstein would never have been anointed Red Sox GM. But anyone who remembers, say, Jamie Dimon and Sandy Weill at Citigroup knows such relationships can be fraught as the junior party begins to emerge. Lucchino--who did not respond to requests for an interview--"has a reputation for being very hands-on with younger subordinates in a way that, after a while, most people struggle with," says baseball consultant Craig Wright. The apparent result, according to Jim Callis, executive editor of Baseball America: "Epstein chafed working under Lucchino."

Henry viewed Epstein as Lucchino's responsibility. That may explain why Henry brushed off a direct warning. Epstein told him in August that negotiations were floundering and "could take a bad turn." Henry says he told his general manager "to just communicate more, to be forthright." Instead of intervening, Henry focused on other matters. The pennant race consumed much of his attention. And, as always, he was managing his hedge funds, several of which had fallen 15% to 20%. (Henry, who is quick to accept blame for myriad mistakes in the Epstein affair, dismisses the notion that he was distracted by his funds' travails.) Whatever the reason, he never plunged into the nitty-gritty of the negotiations until it was too late.

Henry's biggest mistake may have been failing to push for an early resolution. "Negotiating a talent deal against a deadline is never a good idea," says James Sebenius, a Harvard Business School professor who teaches a course in negotiating strategy. Not only does the talent gain leverage as the deadline approaches, but in this case the Red Sox wound up losing not only Epstein but also his likeliest successor, assistant GM Josh Byrnes, who accepted the top job with the Arizona Diamondbacks days before Epstein resigned.

Henry's other key tactical error also stemmed from his hands-off attitude. Epstein wanted to hire an agent to represent him in contract negotiations; Lucchino said no. "I actually thought it was a reasonable request, but I also saw why Larry did not," says Henry. "No front-office person he'd ever dealt with had ever used an agent." Henry now concedes the obvious: The talks would have been less personal had an intermediary been negotiating with Lucchino rather than Epstein himself.

Though Henry's willingness to take responsibility is laudable, what's striking is that the systems guy is still ruled by passion when it comes to the Epstein issue. Plenty of other people could do the job, leaving open the possibility that Henry's real mistake wasn't letting Epstein go but rather making such a public fuss about his exit. Nobody denies that Epstein is a smart guy with good people skills. Schilling, for example, insists he never would have joined the Red Sox had Epstein not charmed his socks off. But mightn't another GM have made an equally good impression?

Epstein acted immaturely at times. According to Andrew Zimbalist, a Smith College economics professor and a well connected sports business expert, Epstein was angered by a Boston Globe column that revealed that it was he rather than Lucchino who reneged on a trade with the Colorado Rockies in July. In the columnist's telling, Lucchino was the hero: "Lucchino took the fall, killing the deal and saving Epstein." Epstein was outraged by the article. During his press conference, he denied that the column affected his decision to resign, but Zimbalist isn't buying it: "It's unlikely you would own up to that because it does seem a little bit callow and precipitous."

It's also worth asking whether Epstein had gotten too much credit. According to one baseball insider friendly with Bill James, many of the under-the-radar players Epstein signed--including playoff heroes David Ortiz, Bill Mueller, and Kevin Millar--were players James had recommended. "Epstein is a better than average GM," this person says. "But there is a lot of credit and blame in this business that gets stuck in places where it's not deserved." James declines to discuss his advice other than to say, "From my standpoint, we sink or swim together."

Finally, Epstein benefited from good fortune. For example, superstar designated hitter David Ortiz emerged only because the Sox's first choice, Jeremy Giambi, flamed out, notes Callis, who adds that the team came within a hair of losing the pennant in 2004. Had that happened, it's doubtful Red Sox Nation would be gnashing its teeth over the departure of a GM who led them to two consecutive defeats to the archrival Yankees. "I think it's possible to be very good at a job and overrated at the same time," says Callis. "Theo probably falls into that category."

WHILE HENRY SEEMS to hold out some hope for a rapprochement with Epstein, could the relationship between Lucchino and him be repaired? Could Lucchino, who is so effective in other ways, change the way he operates to keep Epstein happy? Would Henry want him to? And why should Henry coddle Epstein, who has put himself ahead of the organization? Henry might look a few miles south for guidance. It was in Foxboro nine years ago that the New England Patriots wrestled with the departure of legendary head coach Bill Parcells after he had a row with Patriots owner Robert Kraft. Fans thought the sky had fallen, but not Kraft. "You can't be dependent on one person, because what happens when that person isn't there?" he said at the time. A few years later the Patriots hired coach Bill Belichick and began winning Super Bowls.

Ironically, Henry believes the Red Sox's road back started at his much-maligned press conference. "I know that quote [on whether Henry is fit to be the owner] may not have played well in the papers," he says. "But for me, losing Theo was very emotional--very much like losing Game 7 against the Yankees in 2003. Back then, we all came back to the ballpark the next day so focused and determined to win a championship, which we did the next year. Well, that quote sort of galvanized me in the same way. What gives me great energy and enthusiasm to get past what's gone on here is to prove that I am up for the job. Because I am."

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