A mortgage-securities hedge fund suspends redemptions

By Vikas Bajaj
The New York Times
Wednesday, July 4, 2007

http://www.nytimes.com/2007/07/04/business/04bonds.html?_r=1&ref=business&o

In another sign that troubles in the mortgage market are spreading, a prominent hedge fund that specializes in bonds backed by home loans has suspended redemption requests by investors.

The Horizon ABS Fund managed by John Devaney, a well-known trader of asset-backed securities who is based in Florida, said yesterday that it made the decision to block withdrawals after one investor who accounted for about a quarter of its $650 million in assets sought to leave the fund.

The move comes on the heels of a near collapse of two Bear Stearns hedge funds, which, like Mr. Devaney's fund, invested in complex mortgage securities that do not trade frequently and can be hard to value. Bear Stearns was forced to lend $1.6 billion to one of the two funds after investors sought to withdraw funds and lenders to the funds demanded that managers raise more capital to make up for a drop in market value.

Mr. Devaney's firm, United Capital Markets, said it did not face margin calls and that it had $145 million in cash to meet any demands from its lenders. The firm uses Merrill Lynch as its prime broker. Merrill seized about $800 million in mortgage securities from the Bear Stearns funds.

The fund's borrowings stand at about 1 1/2 times its assets, considerably below the 10 times leverage used by one of the two Bear Stearns funds, according to someone briefed about the fund but not authorized to speak publicly about it.

The Horizon fund allows investors to redeem their stakes in the fund once a quarter with 90 days' notice, a common practice among hedge funds. It appears that the investor who sought to redeem did so after the fund declined by 2.9 percent in May and 2.2 percent in April, according to data compiled by Bloomberg News. The fund was up about 40 percent last year.

The firm said it expected to be down again in June and for the full year. A sizable number of the firm's bonds and derivatives that track subprime bonds were sold last month to raise cash and lower the amount of its debt, in anticipation of redemption requests.

United Capital said it suspended redemptions because it did not want to be forced to liquidate its holdings at a time when the market for such securities was depressed. "We expect to resume processing these redemptions as soon as is prudent, which we hope will be in the very near term," the firm said in its statement.

Mr. Devaney declined to comment through a spokesman.

At 37, Mr. Devaney has established a reputation as a shrewd buyer of distressed bonds. His lavish parties at industry conferences have earned him a measure of celebrity in the world of structured finance. At an industry conference early this year, he seemed to predict a collapse in the market for securities backed by mortgages to people with weak, or subprime, credit.

One analyst, Mark H. Adelson of Nomura Securities in New York, said the redemption requests at Mr. Devaney's funds and others reflected the increasing skittishness of investors at a time when defaults are rising but many bonds have not yet experienced actual losses.

"The whole environment is just so strange," he said. "It puts us all of us into unfamiliar territory."

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