An Australian hedge fund manager has issued a pre-emptive warning in response to the widening US subprime lending turmoil. The move came as some hedge fund investors warned that 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, reports the FT.
Basis Capital, a Sydney-based hedge fund with $1bn in structured credits and junk-rated loans, warned investors on Wednesday that it could restrict withdrawals to ensure its survival as it reported losses of 14 per cent in one fund in June.
In a letter sent this week to investors, Basis said it had been hit by “indiscriminate” repricing of “otherwise fundamentally sound collateral” amid fresh fears of US subprime lending turmoil. It said it had deliberately avoided the worst-hit 2006 subprime loans.
The warning that redemptions can be restricted comes as some hedge funds in the US and UK have been hit by 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.