New York Structured Credit Hedge Fund Plummets 40%

Feb 6 2008 | 12:01am ET

Things must be bleak when your hedge fund manager—after posting an approximately 40% decline on the year—looks for solace in black humor.

Structured credit shop Eidesis Capital is licking its wounds after a disastrous 2007. And, quoting comedian Lily Tomlin, it warns, “things are going to get a lot worse before they get worse.”

“Despite all the well-publicized and traumatic developments to date, the extent of the problems in credit are underestimated and mechanics of what is transpiring in the credit formation infrastructure are still not fully appreciated by most market participants,” the firm’s managing members wrote to investors last month.

“To our mind, subprime mortgages were the weakest and thus the first link in a chain of adverse events now unfolding.”

New York-based Eidesis’ Structured Credit Fund fell 4.75% last quarter, with December its seventh straight month in the red; like other credit funds, it plummeted this summer, dropping 8.18% in June, 7.66% in July, 16.92% in August and 6.93% in September.

Last year was the fund’s first in negative territory since its 2002 inception. It managed about $440 million in April, before its downward spiral began in earnest.

With the credit markets having “taken leave of all fundamental reason and/or sense,” Eidesis announced a planned restructuring in August after drawdowns brought it into violation of net-asset value maintenance covenants of several counterparties. The firm stressed that it was not in danger of defaulting or missing any margin calls. In December, it told investors that it planned to “wait for better timing to monetize the remaining side-pocketed investments,” though it said it had “repositioned the portfolio for the long term.”

Eidesis has also launched a new fund to take advantage of the calamity befalling its flagship. Special Opportunities II is a dedicated short-credit fund, which is “off to a very strong start in January,” the firm said.

“Lest anyone concludes that we are painting a bearish Armageddon scenario, all we are saying is that the capitalist system is about to perform one of its most valuable functions—mercilessly wring out excess and misallocation of resources to enable resumption of healthy growth,” it added.

Eidesis was spun off from St. Paul Travellers in a management buyout in 1998. It is headed by managing members Simon Mikhailovich, Michael Sollott and Jim Wang.

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