One of London’s most successful hedge funds imploded Thursday when Peloton Partners put the assets of its $2bn flagship fund up for sale and froze its remaining fund after geared mortgage bets left it unable to meet lenders’ demands.
Rumours of the crisis at Peloton’s ABS fund, named best new fixed-income hedge fund last month, helped drive the high-quality mortgages in which it was invested to all-time lows this week as traders prepared for $9bn of assets to be dumped.
The losses are particularly striking because Peloton ABS was one of the big winners from the US subprime crisis, gaining 87 per cent last year after betting against low-quality mortgages.
But last month Ron Beller, co-founder, told the Financial Times that the firm had begun investing in “good-quality assets that are trading at deeply discounted prices” – including a large position in AAA-rated mortgages.
Investors in Peloton said the crisis was a surprise as estimated returns for the month to last Friday showed it down only just over 8 per cent.
“It is the classic story of when leverage goes wrong,” one investor said. “But I can’t believe this problem is confined to these guys alone.”
The ABX synthetic index of asset-backed securities touched new lows this week for both high- and low-rated tranches.
In a letter to investors Thursday, Mr Beller and co-founder Geoff Grant said the ABS fund “has recently experienced difficulties in the challenging credit markets” and seen “severe” falls in value.
“In addition, because of their own well-publicised issues, credit providers have been severely tightening terms without regard to the creditworthiness or track record of individual firms, which has compounded our difficulties and made it impossible to meet margin calls,” they wrote.
According to people close to Peloton, the fund was 4-5 times leveraged, normal for a credit fund, with 14 banks owed money, including Goldman Sachs, UBS and Merrill Lynch. The banks are allowing Peloton to lead the sale.
The future of Peloton’s remaining $1.6bn multi-strategy fund, which had about $700m invested in the ABS fund, is under review, Peloton told investors. But people close to the firm said the founders realise investors are unlikely to support its survival.
From: http://www.ft.com/cms/s/0/c5d43fb2-e62c-11dc-8398-0000779fd2ac.html