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Another hedge collapse in Focus

Focus Capital has sold its entire portfolio of Swiss mid-cap stocks after the New York hedge fund - which had $1bn at the start of this month - missed margin calls and was forced to sell by its two biggest banks.

Focus is said by people familiar with its operations to have lost about 80 per cent of its value, although the London-listed Psolve Niche Opportunities Fund, an investor, said in a statement it had written off its entire holding.

The collapse comes as the volatile markets have taken down several credit hedge funds which could not meet margin calls, most notably London-based Peloton Partners’ $2bn ABS fund. But it is rare for an equity fund to have problems meeting margin calls, as typically equity investors are far less leveraged.

In a letter to investors Focus said it was hit by “violent short-selling by other market participants” which meant it could not meet margin calls. On February 26 its two largest counterparties “forced it to sell”, the letter said.

A spokesman for Focus declined to comment on the level of leverage it used, but denied rumours it had been pushed out of business by investor redemptions, saying instead it had been hit by the plummeting value of its investments.

“It was like an avalanche,” he said.

The firm, founded in early 2005 by Tim O’Brien and Philippe Bubb, had generated strong returns until this year. It is now expected to shut down, the spokesman said.

This entry was posted by James Mackintosh on Tuesday, March 4th, 2008 at 16:16 and is filed under Capital markets, Hedge funds. Tagged with , . You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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Comments

  1. Mar 04   17:42 Posted by Graham Cox [report]

    Presumably with much less liquidity. Reminds me about getting wiped out as an Absolute shareholder.

  2. Mar 04   17:14 Posted by CP [report]

    YTD the SMIM index has performed more or less in line with the blue chip SMI index…

  3. Mar 04   17:11 Posted by Graham Cox [report]

    It is all rather surreal. What are leveraged funds doing in Swiss mid-caps?

  4. Mar 04   16:52 Posted by Andrew Teasdale [report]

    You have to wonder about the risks of contagion. Not only the funds who are having to close because of margin calls but those who have holdings in these funds whose assets will also now be devalued and who may likewise be exposed to margin calls.

    This is how it starts, counterparties collapsing. All we need now is a run on hedge funds (investors demanding capital back). Forced sales mean that the asset values that hold one side of the hedge will no longer support the strategy validating the leverage. In today’s markets, leverage is much more than the sword above their heads.

    Andrew Teasdale

    The TAMRIS Consultancy

This post is closed to further comments.