Australian hedge fund warns about withdrawals


By James Mackintosh
Financial Times, London
Wednesday, July 11, 2007

An Australian hedge fund manager with almost $1 billion in junk-rated loans and troubled structured credits warned investors on Wednesday that it could restrict withdrawals to ensure its survival as it reported losses of 14 percent in one fund in June.

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

It said it had deliberately avoided the worst-hit 2006 subprime loans, but there was a market-wide lack of liquidity.

The warning that redemptions could 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.

Restrictions on redemptions are closely monitored by hedge fund investors as an indication of trouble, because any limit tends to prompt a rush for the exit by other shareholders, forcing a fire-sale of assets to raise cash to meet the payouts. Braddock Financial, based in Denver, said last week that it would close its $300 million 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 [funds'] survival through periods of extreme dislocation such as this."

Basis also told investors that "to date" it had met margin calls -- money demanded by lenders when collateral for the loans fall in value -- and another cause of hedge fund failures.

Two Bear Stearns hedge funds imploded last month when they failed to meet margin calls, with the bank stumping up $1.6 billion to bail out one of them.

Basis Yield Alpha fund was down 13.93 percent in June, only its second monthly loss since it was set up in 2003 with the aim of producing steady returns. Basis Pac-Rim Opportunity fund, with less structured credit exposure, was down 9.2 percent. Both funds demand 90 days' notice for redemptions, allowed each quarter, with an extra fee to redeem monthly.

Hedge fund investors warned more funds were likely to limit redemptions to prevent forced sales of illiquid assets at low prices, but that the true scale of the problem might not become clear until September.

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 not until the end of September, or even December, that everyone will see just how bad it is," he said.

Basis Capital did not respond to requests for comment.

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