Liongate Feeds On Credit, Subprime Woes

Aug 16 2007 | 2:10pm ET

U.K.-based Liongate Capital Management’s $1.2 billion Multi-Strategy Fund, a fund of hedge funds, was up 2.12% last month, bringing its year-to-date returns to 13.66%. The firm’s smaller $107 million Select Fund, a more concentrated fund of funds, was also up, by 2.89% in July and 16.72% YTD.

The top contributor to Liongate’s Multi-Strategy fund was its exposure to fixed-income, which contributed 1.10% to the portfolio. The fund also gained on its short corporate credit exposure, profiting from widening credit spreads and rising U.S. sub-prime mortgage defaults.

 “July was a very good month for us but we’ve been bearish credit for quite some time,” Ben Funk, a partner at the firm who oversees its research and quantitative risk management, told FINalternatives

“By the end of 2005, we got out of all of our long credit exposure because we thought the spreads were way too tight. It seemed like there was a lot more risks than opportunities. By January 2007, we gained exposure to both dedicated short corporate credit and three funds that had short sub-prim credit exposures. Those managers did quite well in July and if you look at out returns for this year, we’ve made most of our money in the months where the equity markets haven’t done very well. We think it will get worse.”

Funk added that there’s going to be great opportunities in distressed and credit space and he’s currently looking “mapping out” the current portfolio for the next three to 12 months. “We haven’t had any long credit or distressed in the books for a long time and we’re definitely doing our due diligence and making the rounds with those managers now.”

Liongate has a penchant for investing in mid-sized managers in the $300 million to $800 million range while trying to avoid the mature managers typically running too much capital and no longer aligned with investors. The Muli-Strategy fund, which began trading in April 2004, has achieved annualized returns of 18.81% since inception. Funk said the fund may soft close fund at $1.7 billion.

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