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July 11, 2007
Hedge funds profit from subprime bets
Hedge funds betting on falls in bonds linked to US subprime mortgages raked in returns of almost 40 per cent last month as they profited from the crisis that has engulfed rivals.
A $2bn fund run by New York’s Paulson & Co was the single best-performing fund, rising 39.95 per cent after fees in June thanks to its dedicated bets against subprime mortgages – loans to less credit-worthy homeowners. Other hedge funds following similar strategies produced returns as high as 27.5 per cent in the month, while another manager has tripled investor money this year, according to investors.
The strong returns follow the implosion of two hedge funds run by Bear Stearns, which had borrowed heavily to invest in bonds linked to subprime; the announcement of the winding up of a London-listed fund after big subprime losses; and the suspension of redemptions at a Florida fund invested in the sector.
However, some managers are warning that so many hedge funds piled money last month into bets against subprime that it had pushed up the cost too far. “It is becoming the trade du jour,” said one manager.
Investors in hedge funds say many managers profited from subprime last month by holding short positions through credit default swaps, even in funds that are supposed to focus on equities.
But some fear that undisclosed or mis-priced investments in the hard-to-value bonds and equity of structured products linked to subprime, such as collateralised debt obligations, could lead to surprise losses at some funds as they report later this month. Christian Zugel of New Jersey-based hedge fund manager Zais Group, said in a note to investors last week that losses from residential mortgage CDOs could reach $60bn-$100bn, far more than the $52bn estimated on Monday by Credit Suisse.
“We believe we are entering a severe crisis, with potentially heavy losses for many market participants,” Mr Zugel wrote.
Two other funds that had performed strongly in June were SCSF, run jointly by Texan hedge funds Hayman Capital and Corriente Advisors, which rose 27.5 per cent in the month; and San Francisco-based Passport Capital, which rose 13.8 per cent, investors said.
John Burbank, who runs Passport, said subprime would drop further: “We have a lot more to go here,” he said.
-Financial Times-
Posted by su at July 11, 2007 5:43 PM