Marathon Runs At Sub-Prime Opportunity

Jul 31 2007 | 10:17am ET

It’s been a loser so far in the sub-prime realm this year, but Marathon Asset Management has a plan to turn its luck around.

The New York-based hedge fund has announced plans to launch a distressed mortgage fund, seeking to take advantage of the “fallout and carnage” wreaked by the sub-prime swoon, MarketWatch reports.

The Marathon Distressed Sub-Prime Fund is to begin taking commitments in August.

“The meltdown in the sub-prime mortgage market has been absolutely stunning, and given this significant opportunity, Marathon has decided to roll out this fund,” Marathon President Bruce Richards said in a letter to clients obtained by MarketWatch. The new fund, which features a defined investment period of roughly two years, “has been established to capitalize from the fallout and carnage in the sub-prime mortgage market with a core investment strategy to opportunistically purchase distressed mortgage-related securities and sub-prime assets,” he wrote.

Marathon’s structured Finance Fund’s sub-prime positions have fallen “significantly,” but Richards said the portfolio’s other holdings have more than made up for it. That fund is up year-to-date, and its investors will also be given a crack at the $9 billion firm’s new strategy.

 The firm also bought $125 million in convertible trust preferred securities of sub-prime lender American Home Mortgage Investment Corp. The securities pay a 9.75% dividend, but the troubled lender, facing “significant” margin calls, has stopped paying some dividends. Marathon’s shares are convertible at an initial conversion price of $25.57 a share, closed yesterday at just $10.47.

The firm will share in 20% of the fund’s profits, but only after it has returned investors their principal.
Marathon’s move comes more than a week after Ellington Management’s Michael Vranos announced plans for a $750 million permanent capital fund to profit from the sub-prime slide.

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