2008-02-29 17:00:28
Peloton Partners LLP Asset Seizures A Sign of Things to Come for Hedge Funds?
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Yesterday we told you that Peloton Partners had decided to shut down their "ABS Master Fund", a fund that had bet against the subprime credit market and had made over 87% for its shareholders last year.
Just a few months into 2008, Peloton Partners LLP had decided to shut their ABS Master Fund down and halt redemptions in their smaller "Multi-Strategy" fund.
The company had run into two problems. Number one, it had taken a loss in some mortgage-related investments so far in 2008. Number two, and a much bigger problem, is that the hedge fund was extremely leveraged and their lenders were starting to get nervous about the level of holdings that Peloton had. According to some estimates, Peloton held $10 billion in assets but only had $2 billion in assets in their "Master Fund".
The two managers of the fund, Ron Beller and Geoffrey Grant, had reportedly been trying to find a solution to their problem without having to move into forced liquidation of their positions. Obviously the banks (which reportedly included UBS and Deutsche Bank) had been breathing down their necks to either lighten their positions or find another solution. Reportedly Citadel Investments Group had a look at the books to see if they might be interested, but nothing came of it.
So today we read that some of the fund's lenders (not named in the report that I read) have taken control of some of Peloton's assets. Apparently some of the lenders (there are more than ten) were willing to let the fund slowly unwind their positions so as not to incur any extra short-term losses, while other lenders wanted to take matters into their own hands.
With the credit markets weak worldwide, I would expect that this will be a trend that will likely continue. Lenders are going to be looking to reduce their exposure to hedge funds who operate using large amounts of leverage in order to minimize any potential losses. This will result in more hedge funds failing and closing up shop, and a great deal of forced asset liquidations that will certainly have a major impact on the markets.
Peloton has not said what it will do with their currently shuttered Multi-Strategy Fund, however I do not see it surviving, especially since this fund has $700 million of its total $1.7 billion in assets invested in the larger ABS Master Fund.
The Peloton funds went from riches to rags in just a couple of months. They went from toast of the town to boarded up from the beginning of January to the end of February. It is unknown exactly how much of their assets that investors in the funds will be able to salvage.
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