Australian Hedge Fund, Down 80%, Calls It Quits

Aug 30 2007 | 11:40am ET

Australian hedge fund Basis Capital Fund Management, battered by losses in the U.S. sub-prime mortgage market, is throwing in the towel on its Yield Alpha Fund after reporting losses greatly exceeding previous worst-case estimates.

The Sydney-based hedge fund manager, last year’s Australian Hedge Fund of the Year, has applied for chapter 15 bankruptcy in the U.S. and placed the Yield fund into provisional liquidation. The chapter 15 move—along with restraining orders obtained in the U.S. and Britain—will keep the fund’s creditors from seizing any more of its assets. The once A$320 million fund, which was highly leveraged and heavily invested in collateralized debt obligations, was left with just A$100 million in “assets and liabilities,” according to court filings.

Grant Thornton, hired in July to negotiate with Basis creditors, has been retained as provisional liquidator. The firm said it will report to investors on the fund’s positions in three to four weeks, according to the Australian.

Two weeks ago, Basis sharply downgraded the fund’s prognosis, saying investors could lose more than 80% of their investments. When the firm first faced trouble in the sub-prime markets, it warned that a forced asset sale could cause investors to lose roughly half of their money.

The Yield fund had already been declared in default by such luminaries as Citigroup, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch and Morgan Stanley.

One fate it may avoid is that suffered by the similarly-situated Bear Stearns: A court fight. Aussie law firm Slater & Gordon is considering a class-action, but is focusing its ire on the financial planners who recommended Basis, as well as the ratings agencies that gave it such high marks, rather than on Basis itself, the Australian reports.

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