U.S. News

Second Australia Hedge Fund Suspends Withdrawals


A second Australian hedge fund has become caught up in the subprime mortgage fallout, with Absolute Capital telling investors it has suspended withdrawals from two funds until October due to a lack of liquidity in structured credit markets.

Sydney-based Absolute Capital, which specialises in structured credit assets and is half-owned by ABN AMRO Australia, said the two funds are Absolute Capital Yield Strategies Fund and the Absolute Capital Strategies Fund NZD, and are worth A$200 million ($177 million) combined.

The suspension follows a decision by Australian hedge fund Basis Capital to suspend redemptions on two of its funds and appoint U.S.-based Blackstone Group as financial adviser to help prevent a fire sale of its assets.

"Absolute Capital believes a temporary closure of the funds is the best defensive measure to protect the longer term interests of our investors given the current illiquid nature of the funds' investments," Absolute Capital Group Managing Director Deon Joubert said in a note available on the firm's webpage.

The two funds invest in structured credit assets including collateralised debt obligations (CDOs). But the note said they had less than 5.0% of assets invested in U.S. subprime and
did not invest in higher-risk equity tranches of the CDO market.

The funds were likely to post losses of 4% to 6% in July, it said. The U.S. subprime mortgage crisis emerged after lenders reduced lending standards for the riskiest home loans, which were
securitised and unsold. A crash in the U.S. housing market has since led to a rise in mortgage defaults and a wave of credit downgrades.

Basis Capital, which securitised "non-conforming" assets such as car loans and personal loans, warned earlier this month that ratings downgrades on U.S. subprime debt had led to falls in the value of securities. It then suspended withdrawals.

However, contrary to Basis Capital, Absolute said it did not have margin calls in place. "As such there is no pending trigger of any facility conditions that would require immediate repayment," Absolute's note said.