Failed Australian Hedge Fund Solvent, Will Repay Creditors

Dec 18 2007 | 10:44am ET

For creditors of collapsed Australian hedge fund Basis Yield Alpha, there is some holiday cheer. The banks that lent the hedge fund money—and then seized its assets when it missed margin calls—are likely to recoup all of their money, as the fund—now in provisional liquidation—has become solvent once again, thanks to continued coupon payments from some collateralized debt obligations it holds.

In a letter to investors, Basis Capital said the fund has amassed US$60 million in cash, enough to pay off its creditors. The fund also held out the prospect that there could be something left for investors, as it has still been unable to value the disastrous structured credits that caused the hedge fund to fail in the first place.

But the fund’s liquidator, Grant Thornton’s Steve Akers, threw some cold water on the holiday cheer, warning that things are going to get worse for hedge fund investors before they get better. He says banks are reluctant to force any hedge funds out of business—as they did with Basis and with two Bear Stearns credit hedge funds, which collapsed earlier this year—because it would hit their bottom line at a sensitive time. In other words, expect more hedge fund collapses early next year.

In an interview, Akers said, “The banks know if they push them into insolvency that they would have to reflect that on their own balance sheets and they’ve been holding off on doing that for fear of damaging their share prices.”   

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