14 replies to this topic

[johngeorge]

NEW YORK, July 3 (Reuters) - Providing liquidity while making risky subprime mortgage bets proved to be a bad hand for United Capital Asset Management and other hedge funds recently gambling on risky investments.

Earlier this year, during an American Securitization Forum industry conference in Las Vegas, John Devaney, founder and chief executive of United Capital Markets, was among the most passionate of panelists who highlighted their key roles as willing traders of a market whose losses were mounting.

"Hedge funds have provided a very positive impact on reducing price volatility over the last two to three years," said Devaney, who billed himself as the Ace of Spades on a deck of playing cards he distributed to ASF attendees.

Prior to that, Devaney said he capitalized on a difficult period in the ABS market, when secondary liquidity and analysis was needed, to establish his firm. United Capital became a source of much-needed liquidity in the riskier portion of the ABS market.

United Capital Asset Management said on Tuesday it was forced to temporarily suspend redemptions for its Horizon Funds group due to volatility in the structured finance market. The firm said it had received an unusually high number of redemption requests in June from investors, including one large one from an investor who had put up about 25 percent of the funds' money. However, it planned to continue operations.

"We wish to emphasize that UCAM and Horizon are not liquidating and intend to continue in operation," the firm said in a statement. "We have spoken to our lenders and they are supporting our efforts," it said.

The funds, including Horizon Fund L.P., Horizon ABS Fund L.P., Horizon ABX Fund Ltd and Horizon ABS Master Fund Ltd., hold most of the firm's assets under management, which stood at about $619 million as of March.

"I wouldn't be surprised if you see more investors trying to take money out and being restricted by the funds that they're invested in," said Jim Palmieri, portfolio manager at GE Asset Management. "These funds are invested in collateral that doesn't have quite the liquidity of the rest of the fixed income market."

Worries have heightened in recent weeks about a potential spillover to other hedge funds who hold similar risky assets.

"You have a market that evidently was extremely nervous over the sale of Bear Stearns hedge fund collateral because of the mark-to-market," said Darcy Morrison, analyst at Evergreen Investments in Charlotte, North Carolina. "Now you have holders who are not willing to take a chance due to the lack of liquidity for their assets. It's almost like who's going to go first and take a hit," Morrison said.

The ABX subprime mortgage index has posted a series of record lows after two Bear Stearns Cos.-managed <BSC.N> hedge funds hit rock bottom by making bad bets on risky mortgages. Rising delinquencies on loans made to borrowers with poor credit, which are pooled into securities like ABS or collateralized debt obligations, also heightened concerns.

United Capital's Horizon hedge fund lost money when closing down its position in the ABX. "We view the synthetic markets as highly volatile and, at this time, have stopped trading them entirely," it said.

As of Tuesday, the firm said it had in excess of $145 million of cash as a cushion against current lending requirements and expects to resume processing redemptions in the near term. Through combined trading losses and market repricing, the firm expects to end the year down.

United Capital said it reduced many cash bond and synthetic positions in June and sold a large amount of cash securities into the market without issuing bid lists or conducting auctions.

"The secondary market for some of this stuff right now is just terrible. If you're going to provide money for everybody who wants refunds then that means you're going to have to sell into a terrible market," said one bond investor.

In May, Swiss bank UBS <UBSN.VX> reported lower first quarter net profits and the closure of its Dillon Read hedge fund arm, which was hit by losses in the U.S. subprime mortgage market. Dillon Read Capital Management ran up losses of 150 million Swiss francs ($124 million) in the first quarter.

"Until two weeks ago, the market was mostly focused on trying to discern the impact of the declining housing market and deteriorating collateral performance on the 'fair value' of subprime-related assets," said Richard Parkus, Deutsche Bank analyst, in a recent report.

"However, with the events surrounding the problems at the two BSAM (Bear Stearns Asset Management) structured credit hedge funds, the market is now focused on the risk of a wider-scale contagion issue that could potentially impact other sectors as well," the analyst said.



http://today.reuters.com/news/

[OEXCHAOS]

Yanno, The way the news keeps coming out, I can't help but think that somebody wants massive mis-pricing on these mortgages. If I had big money (and expertise in analyzing sub-prime debt), I'd be circling like a vulture. Not all of those mortgages are going to go teats-up. In fact, I'd bet most don't and that in many cases where they are in real trouble, work out provisions will be made that perhaps suck for the original lender but for the new holder will be more than generous. I think that the problem is that folks don't really know what they've got and that they've pretended that something that is potentially a case-by-case type thing can be efficiently aggregated and traded. Oops! Mark

[da_cheif]

If you think this news means anything to the stock market.......i remember the fear generated by the Continental Illinois collapse........then the end of the world scenario born out the the collapse of the entire savings and loan industry.......how about the asian collapse........how bout viet nam........korea.......kennedy assasination.........WWI ..WWII ..civial war...war of indepence.....desert storm...granada...hitler...sputnik...castro....pee wee herman......wollie.........how about the total wipe out of the WTC.........u guys worry 2 much......SNORT

Edited by da_cheif, 04 July 2007 - 09:37 AM.

[ogm]

If you think this news means anything to the stock market.......i remember the fear generated by the Continental Illinois collapse........then the end of the world scenario born out the the collapse of the entire savings and loan industry.......how about the asian collapse........how bout viet nam........korea.......kennedy assasination.........WWI ..WWII ..civial war...war of indepence.....desert storm...granada...hitler...sputnik...castro....pee wee herman......wollie.........how about the total wipe out of the WTC.........u guys worry 2 much......SNORT

Just curious. What do you think will cause the next major correction. And at what levels ? Unless of course you think there will never be any major corrections again.

Edited by ogm, 04 July 2007 - 09:45 AM.

[da_cheif]

next major correction will be a result and end product of the investing public being invited into the stock market enmass by a very sharp advance conducted by the boys in order to accomodate their inventory objectives...ie distrubutions of the inventory accumulated during the prior assault on investors sensibilities.....and off course these invitations via a sharp advance will also accomodate exchange insider short sales....worrying about missing the mother of all bull markets should me your focus rather then worrying or wondering when the next major correction is goin to be conducted......why worry....when you got an army of professional worriers doing it for you........certainly there are very few worrying about missing a monster advance..........:>)

[Jnavin]

Pee Wee Herman, chief?

[pdx5]

It has been SEVEN years since the last peak in SPX, and we are still aprox 25% below that peak when you take into account compounded inflation during those years. IOW, SPX has to exceed 1900, and real soon to call it a real bull market. Every year that goes by simply makes the value less when adjusted for inflation. But that could also mean that SPX would have to advance 25% from here to make it hyper-extended as it was in 2000. So, there is more room for an advance.

[arbman]

Somebody will eventually figure these out, so I am just speculating. I did not compile the COT data myself, but I am using a commercial service to evaluate their relative positions... There was probably no time in history that the IWM ETF and RUT futures contracts were so heavily sold short. It is mostly a few large traders vs the commercials. The small specs are more or less neutral on the R2K... If the commercials are the smart money, this should probably double within 12 months, don't count on it... Given the blow up in the Bear Strens' fund and these private equity IPOs coming out with their heavy junk bond portfolios, one goes to wonder whether there is remotely anything like the smart money among the commercials and whether it can be really found in the COT data at the moment... I don't know exactly the influence of the large traders vs the commercials on the gov't to get them to inflate until they are squeezed out, certainly the Fed will not inflate without a sizeable correction first. But the credit crunch that is squeezing the spreads higher and their sinking IPO prices are telling that the action is needed asap, otherwise the large specs will make a killing of the commercials on the R2K issues, or it seems?!? Certainly not, the large specs are most likely holding the short positions on the RUT to cover their bad bets in the junk bonds as the private equity IPOs reveal now!!! Same can be said pretty much for the other indices, SPX and NDX COT positions, except for Dow. The small specs are in fact just as long in the large contracts as the commercials. Nevertheless, the small specs will not be making much on a correction here --and I doubt they are holding much in junk bonds-- and especially if the commercials manage to sneak out --or if they already did over the last 5 days, the small specs will be burned again. However, the actual short positions on the stocks is a completely different story, they are still at the historic highs, so there is probably a long term support under the market... - kisa

Edited by kisacik, 04 July 2007 - 03:08 PM.

[arbman]

next major correction will be a result and end product of the investing public being invited into the stock market enmass by a very sharp advance

So Cheif, The annualized rally of the SPX from the March lows is about 34%, it was more a few weeks ago since the market consolidated (so far) and 44% on NDX. Isn't this enough to lure them?

off course these invitations via a sharp advance will also accomodate exchange insider short sales

... and they've been doing that too more than before at least...

[da_cheif]

its not the overall advance that lures anyone.....its the speed and amplitude that does it....slow irregular advances nobody trusts.......prime examples are some of the market observers that populate this board for the last seven thousand points.