Lipper HedgeWorld Staff.
Although plenty happened between the start of April and the end of June, all anyone ended up talking about was Bear Stearns and the meltdown in the subprime mortgage lending sector.
Bear Stearns Cos. Inc. on 22 June said it would provide up to $3.2 billion in financing for a struggling hedge fund it manages, but sources said a second fund was still working out a restructuring plan with creditors. The bailout news sent financial markets into a tizzy, spurring investors to sell shares, particularly of investment and commercial banks, and buy safer Treasury Bills.
Bear Stearns, the fifth-largest US investment bank, held tense negotiations with creditors for more than a week after two funds suffered big losses from bad investments in securities linked to subprime mortgages and other forms of debt. Creditors had threatened to seize assets from the funds and sell them off, even after Bear Stearns said it would add $1.5 billion of its own capital, sources said. Merrill Lynch went so far as to sell $100 million of assets from the funds, after seizing some $850 million of securities. Bear said it provided secured financing to the High-Grade Structured Credit Strategies Fund, which, according to a source familiar with the matter, was down about 5% through the end of April. Sources said that the financing would eliminate exposure that banks, including Citigroup and Barclays plc, had to the fund. But many banks still had exposure to a sister fund, High-Grade Structured Credit Strategies Enhanced Leverage Fund. That fund was down 23% for the year by the end of April.
By late June, it seemed Bear Stearns would salvage some portion of its failing structured credit portfolio by de-levering slowly after buying the debt back from creditors. So far the bank has bought the debt of only the less geared-up version of the strategy — the High-Grade Structured Credit Strategies fund. But even the less leveraged fund’s investments were large compared to its equity capital. How large? There isn’t enough information to gauge a long-term leverage, but a snapshot rough estimate is possible.
The two funds went long and short on collateralised debt obligations, including notes on pools of subprime mortgage bonds. Overall, they were heavily bullish. One way to measure the leverage is to compare the net long investments to capital. By this yardstick, the less debt-dependent pool, High-Grade Structured Credit Strategies, had net long investments equal to six times its equity in March, according to a calculation by HedgeWorld. The corresponding rate for the more heavily geared-up High-Grade Structured Credit Strategies Enhanced Leverage Fund was 11 times equity. Taking the two Bear funds together, total equity capital added up to $1.6 billion. To get another perspective, total exposure to the structured credit market on both the long and short sides by the two funds was nearly $30 billion in March. That indicated the effect of all sources of levering. Total net long positions for the two funds amounted to $12.7 billion.