Hedge funds urge calm as Basis crisis deepens

Australian hedge fund managers have moved to reassure investors as the fallout from the Basis Capital crisis gathers force.

Friday, July 20th 2007, 5:42AM

by David Chaplin

At least two hedge fund managers, Absolute Capital and Select Asset Management, issued notes to investors distancing themselves from the US sub-prime mortgage and Collateralised Debt Obligation (CDO) markets.

It was revealed last week that the Australian manager Basis was in trouble after its exposure to the US sub-prime market through CDO investments had led to losses in its Yield Alpha fund of almost 14% in June, while its Pac-Rim Opportunity fund, dropped 9.2 per cent the same month.

Basis indicated it would halt redemptions on the Yield Alpha fund and has since entered crisis talk with creditors after banks took control of some of its assets related to the US sub-prime market.

In a note to investors Absolute, which has raised over $50 million in New Zealand for its two listed PINS products, said it "remained confident in our portfolio".

"In terms of CDOs and Collateralised Loan Obligation (CLOs), the Funds do not own equity tranches. The Funds invest only in CDO and CLO debt tranches, which are protected by at least the equity tranche," Absolute said in the note.

According to NZX releases, on July 6 Absolute confirmed scheduled interest payments would be made on both its listed PINS products which are both trading above par value. Select said "while the full implications of recent events may take some time to unfold" it urged hedge fund investors not to panic.

"While we believe the greater recognition of risk in debt markets could result in opportunities in these areas emerging over time, we will pursue these cautiously as there is the possibility that this is the beginning of a significant widening in credit spreads across the debt spectrum," Select said.

Select, which has not raised any money in New Zealand, is not exposed to the US sub-prime market.

The near collapse of Basis also comes as two US Hedge funds operated by Bear Stearns fell over as exposure to the sub-prime market wiped out their value.

Basis has raised over $1 billion from Australian investors since launching in 1999 with over 70% of understood to have been sourced from retail investors through the financial planners. The hedge fund manager was highly-rated by research houses, including S&P which had short-listed Basis for an upcoming award.

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