Subprime Mortgage Woes Extend to Hedge Funds

The subprime mortgage woes are now affecting hedge funds, with one closing up shop and the other halting investors from withdrawing their money, according to The Wall Street Journal.

Denver-based Braddock Financial Corp. wrote a letter to investors this week stating it was closing its roughly $300 million Galena Street Fund, which invests primarily in bonds backed by subprime mortgages extended to borrowers with poor credit, and suspended redemptions until it can sell assets.

The fund had about $400 million a year ago, but lost $100 million when the value of subprime-related investments declined and investors started to withdraw money, a Braddock official said.

According to a letter Galena wrote, the fund barely had any leverage. It also had begun amassing significant “short” positions, betting that its own investments would decline.

At first the strategy paid off with Galena posting about 7% in profits last year. This year, losses of 3% were most likely mitigated by the hedging, investors said. Last month, the fund lost from 4% to 8% alone.

United Capital Asset Management in Key Biscayne, Fla., has recently stopped its investors from withdrawing money from four hedge funds. The funds have around $500 million in assets, which are tied to subprime mortgages and have suffered losses. The firm has received a bunch of withdrawal requests.

United stated it expects to post losses for last month, as well as 2007, although the fund has not finished its month-end accounting and valuation work.

Founder of United John Devaney stated that buying opportunities could emerge soon, but worries about the market and pressure from investors forced him to do a lot of selling in the last month, to try to keep a lid on losses.

United stated that most of its selling is over and it will continue to operate its four hedge funds that were launched in April 2005. The firm states it has more then $145 million as a result of recent selling and plans to start working on withdrawal requests.

In the next coming weeks, more hedge fund troubles are expected to surface. Some firms may feel more pressure from lenders to provide collateral to back the leverage or borrowings they’ve taken on, as the value of existing collateral declines in value.

“The marketplace for mortgage-related asset-backed securities is characterized by a wide difference between bids and offers, and as a result, trading volume has dropped,” said Paul Ullman, who runs Highland Financial Holdings Group in New York.

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