Australia Hedge Fund Warns of Investor Losses

Troubled Australian hedge fund Basis Capital has warned investors they may only get half their money back and has appointed an accounting firm to help manage a sale of assets, according to media reports.

The $2 billion dollar hedge fund, reeling from heavy losses in the turmoil of the U.S. subprime mortgage market, told investors it had defaulted on some loans, leading creditors to seize assets and put them up for sale, the reports said.

As a result, Basis had appointed accountants Grant Thornton to advise on the restructuring and warned that the sales might only return 50 cents on every dollar, reports said.

Basis did not return calls and Grant Thornton declined to comment.

Reports said Basis' founders, Steven Howell and Stuart Fowler, were locked in crisis talks with eight creditor banks including JPMorgan, Citigroup, Goldman Sachs, Bear Stearns and Deutsche.

The Wall Street Journal reported on Wednesday that Citigroup and JPMorgan Chase had already drawn up several lists of assets and were shopping around for cash bids.

On Monday, Basis Capital suspended withdrawals from its flagship fund, days after informing investors that the investment house had been swept up in the U.S. sub-prime mortgage crisis.

"The current situation in structured credit markets is currently extremely uncertain which has resulted in difficulty valuing the underlying investments of the funds. For that reason, we have decided to suspend applications and redemptions," said the firm's Managing Director Stuart Fowler, in a brief statement.

The Basis Yield Fund, with net assets of A$341 million ($296 million) in net assets, fell by just under 13.7% and Basis Aust-Rim Fund, with A$316 million in net assets, fell by 9.2% in June, according to a report by the Australian Financial Review.

Ratings agency Standard and Poor's had been due to talk to the hedge fund to discuss the underperformance of the funds on Wednesday, but the meeting was yet to take place, one report said.

Basis Capital's turmoil follows the collapse of two of Bear Stearns's hedge funds which bet heavily on risky subprime loans.

Bear Stearns told investors on Tuesday the funds now have "very little value." The losses sent a benchmark index of subprime mortgage bonds to record lows, reflecting concern that the worst is not yet over for the US$7 trillion market for mortgage-related bonds.