Subprime-Exposed Hedge Fund Investors Behind The Gates of Hell

The list of hedge funds closing the gates on redemptions has now spread to Australia. To paraphrase Kevin Depew on Minyanville who often jokes about containment in his daily "Five Things", it seems the subprime lending crisis is now contained to three continents with yet another hedge fund warning about withdrawals:

An Australian hedge fund manager with $1bn in structured credits and junk-rated loans warned investors yesterday it could restrict withdrawals to ensure its survival as it reported losses of 14 per cent in one fund in June.

Basis Capital, based in Sydney, said in a letter to investors it had been hit by “indiscriminate” repricing of “otherwise fundamentally sound collateral” amid the crisis in US home loans to less creditworthy investors.

The warning that redemptions can be restricted comes as a series of hedge funds in the US and UK have run into trouble from the collapse in price of illiquid, or hard-to-trade, securities linked to subprime loans.

Braddock Financial, based in Denver, said last week it would close its $300m Galena Street fund because of redemption requests, while United Capital Holdings, in Florida, suspended redemptions.

Basis Capital, run by Steve Howell and Stuart Fowler, said the quarterly limits it imposed on redemptions – known as gates – were “designed at inception to ensure the [fund’s] survival through periods of extreme dislocation such as this”.

Rick Bernie, a director, said he expected the gates to be used, although redemption requests had not yet come through. “We’ve always said when the world blows up, if you don’t have a tight enough gate it is like saying, ‘Pick us first’ [to redeem],” he said.

David Smith, chief investment director of multi-manager funds at GAM, said most funds had quarterly withdrawals, and they would not need to tell investors they were imposing restrictions until the money was due to be repaid.

“It is the end of September, or even December, that everyone will see just how bad it is,” he said.

These problems seem to be spreading quickly. Investors in Bear Stearns High-Grade Structured Credit Strategies Enhanced Leveraged Fund are not only locked in, but are getting bids of 5 cents on the dollar. The ask is a mere 11 cents. That's what happens when you are locked behind the gates of hell. See Redemption Trap & Merrill Lynch Cover-Up for more on who is locked in.

The damage is spreading beyond the hedge funds to Bear Stearns itself.

Here is a chart of Bear Stearns (BSC).
click on chart for a better view

BSC has not spent much time below the 50MA since October of 2002. It has also lost over $30 since its January high. For comparison purposes here is a chart of Goldman Sachs (GS).

GS (click on chart for a better view)

Back to the Gates of Hell

You have to laugh at this statement by Basis Capital: "indiscriminate repricing of otherwise fundamentally sound collateral".

Mish Translation: "We were over leveraged in risky assets that with another good roll of the dice would have made us filthy rich. Last year we rolled the dice and won. This year it was craps and investors will pay the price. We are locking the gates to keep management fees coming in for as long as we can or until the fund blows up, whichever comes first. It had to end sometime and honestly this went on far longer than even we expected."

Comments

[Brian Croner]

So the hedge funds are about to eat it, eh?

[Brian Croner]

5 cents, maybe 6, on the dollar. Worse in late September, December. And encryption doesn't work anymore. Gotta have me around. I've been through worse.