First To Worst: Top Aussie Hedge Fund Burned By Sub-Prime

Jul 20 2007 | 8:21am ET

It’s about as far from Bear Stearns’ Madison Avenue headquarters as you can get, but the sub-prime market has struck again, this time Down Under.

Australia’s Basis Capital has failed to meet margin calls, leading some lenders to declare its Basis Yield Alpha Fund in default, research firm Zenith Investment Partners said yesterday, citing a note Basis sent to investors on Wednesday. In a Bear parallel, some of those lenders are apparently moving to seize the fund’s assets.

According to Zenith, Basis—just one year removed from being named Australian hedge fund of the year—has told investors that if its assets are seized and sold at “distressed sale prices,” the fund’s net asset value could be halved. The fund was down about 14% last month, MarketWatch reports.

Zenith said Basis, like Bear before it, is negotiating with its lenders and has hired accounting firm Grant Thornton to assist with an orderly sale of assets.

“This latest information is obviously very concerning, as the effect of the default with its financiers’ results in Basis losing control of the timing and potential sale price of securities in the portfolio,” Zenith wrote in its report. “There is no way to determine the likely action of the financiers and the prices they may achieve for the sale of securities in the portfolio. This could lead to significant losses to investors in the Yield Fund.”

Basis pointed the finger elsewhere for its troubles, arguing that its “otherwise fundamentally sound collateral” had been adversely affected by brokers “indiscriminate pricing” of assets.

“This indiscriminate pricing is largely the result of a market-wide lack of liquidity, which has resulted in very little collateral actually being traded,” Basis wrote in its mea culpa to investors.


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