Stark Set To Offer Short Subprime Hedge Fund

Apr 25 2011 | 2:20pm ET

Stark Investments is poised to launch its first new hedge fund since the financial crisis—one likely to remind investors about that crisis.

The firm's RMBS CDS Opportunity Fund plans to invest in credit-default swaps to short subprime mortgage-backed securities. Similar strategies earned hedge fund managers such as John Paulson billions in 2007 and 2008 as the subprime mortgage market collapsed, a prologue to the much more serious and widespread crisis then still to come.

St. Francis, Wis.-based Stark said the new fund is designed to profit from a small window—only months long—that will see some subordinate mortgage-backed bonds battered by the markets.

In some, "the level of delinquencies and severities will completely wipe out any value of underlying cash positions," the firm told potential investors. What's more, buying CDS is getting cheaper as new regulations in Europe force banks to dump their swaps to meet new capital requirements.

RMBS CDS is expected to launch shortly, Hedge Fund Alert reports. Stark, which has been marketing the vehicle since February, has about $150 million in commitments for the fund.

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