Second Basis Hedge Fund On The Brink

Sep 27 2007 | 12:54pm ET

Last year, it was Australian hedge fund of the year. This year, Basis Capital can’t stop the bleeding.

The Sydney-based hedge fund manager said yesterday that its Aust-Rim Fund—the only one of its funds not currently seeking bankruptcy protection—is down about 50% this year after a disastrous summer. Earlier this year, the firm was forced to shutter its flagship Yield Fund, which was battered by the collapse of the U.S. subprime market and may have lost as much as 80% of its value.

The Aust-Rim fund lost 13% in June and 33% in July but despite huge losses and redemption suspension, the firm’s founders insist that Aust-Rim—and Basis itself—remains in business, though the Blackstone Group has been advising the fund and considering “all options.”

“For us, it’s been working around the clock in the three financial time zones,” co-founder Steve Howell told The Australian. But he added, “It’s still a going concern.” They’ve even added a pair of structured credit clients since the fiasco broke.

In the interview, Howell and co-founder Stuart Fowler sought to disclaim responsibility for their funds’ precipitous declines. The duo said their funds had no direct exposure to the U.S. subprime market, and minimal indirect exposure, and that regardless, the subprime disaster was impossible to predict.

“We were careful in our analysis of the market,” Fowler said. “We were careful in how our fund managers had chosen exposure from the market and how we in turn had an exposure through that process.”

Calling the banks, whose margin calls precipitated Basis’ crisis, “judge, jury and executioner,” Fowler and Howell said they were considering their legal options. Both said that their first indication of trouble came on July 16, when ratings agencies downgraded a slew of subprime debt securities.

Cold comfort though it will be to their investors, Fowler and Howell did take the time to pat themselves on the back for their openness, warning investors that other hedge funds are not being as frank as they.


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