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Hedge Funds were an important part of the overfunding issues that the real estate markets are trying to get themselves out of. One of these funds, Horizon ABS, is now facing a sputtering market and is trying to keep their fund intact. One of the larger investors in the fund who is used the double digit returns it has offered (40 percent last year) now wants out.

The Horizon ABS fund whose liquidity is much better than the Bear Stearns funds that hit the skids last week sought to block the withdrawal as it would put a major strain on the cash flow of the fund. While Bear Stearns was leveraged at 10 times it’s assets, meaning for every 10 dollars of investment they had borrowed 100 dollars, Horizon ABS is only leveraged at 1.5 times assets. This is a huge difference as unwinding the fund is much easier at these levels while Bear Stearns went all in to use poker speak.

For the hedge funds that provided the underpinnings of the liquidity of the subprime mortgage market the next few quarters are going to be rough. They have provided amazing returns to their investors based upon loans that now look very suspects. These investors will look to pull out and not take the losses when they are used to such gains thus forcing the hedge funds into dangerous waters.

The Horizon ABS Fund managed by John Devaney, a well-known trader of asset-backed securities who is based in Florida, said yesterday that it made the decision to block withdrawals after one investor who accounted for about a quarter of its $650 million in assets sought to leave the fund.
The move comes on the heels of a near collapse of two Bear Stearns hedge funds, which, like Mr. Devaney’s fund, invested in complex mortgage securities that do not trade frequently and can be hard to value. Bear Stearns was forced to lend $1.6 billion to one of the two funds after investors sought to withdraw funds and lenders to the funds demanded that managers raise more capital to make up for a drop in market value.
Mr. Devaney’s firm, United Capital Markets, said it did not face margin calls and that it had $145 million in cash to meet any demands from its lenders. The firm uses Merrill Lynch as its prime broker. Merrill seized about $800 million in mortgage securities from the Bear Stearns funds. via  New York Times.

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3. SubPrime Mortgage Problems Made Worse By Wall Street Arbitrage
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