Bear Stearns, stalling in its attempt to staunch panic among investors, this week suspended redemptions in a third fund that is exposed to US mortgages. The move comes as the New York investment bank continues to reel from the debacle of two other hedge funds that had problems with sub-prime mortgages. Its latest casualty is the USD850m Asset-Backed Securities Fund, which has suffered undisclosed losses in July. The New York bank hopes to squeeze some value out of its outstanding positions since it hasn't employed leverage, and hence doesn't have an imminent deadline to sell the holdings that are largely tied to Alt-A and prime mortgages.
Another spectacular blowup was that of Boston-based Sowood Capital, the USD3bn outfit established by Harvard Management alumnus Jeffrey Larson. Sowood took the credit market meltdown on the chin, reporting losses of 10% so far this year. The losses were racked up largely during the last two months. Kenneth Griffin's Citadel Investment Group of Chicago picked up Sowood's credit holdings, supposedly at a steep discount. Citadel manages USD14bn of assets.
In light of the deterioration of credit markets, prime brokerages are imposing tougher lending terms on hedge funds. Many primes have raised their margin requirements. This could further hurt hedge fund returns. Meanwhile, Jeremy Grantham, chairman of money management behemoth Grantham, May, Van Otterloo & Co in Boston, noted recent declines in the US credit markets could prove to be the nail in the coffin for 50% of all hedge funds.
At the same time, the USD9bn debt manager Marathon Asset Management plans to launch a new fund this month. The new entity will invest in distressed mortgage assets. Still, Marathon isn't alone in its pursuit of new money. Industry titans Tudor Investment and Tontine Partners are the latest entrants to a growing list of big funds that are pursuing fresh capital. Caxton, Renaissance Technologies and SAC are also among the seekers.
A recent research shows fewer hedge funds are registering with the US regulator Securities and Exchange Commission. Registrations grew 1.5% in the 12 months to April, compared with a roughly 20% increase a year earlier.
On the fund administration side, Oskar Lewnowski's Bermuda-based Olympia Capital was sold to European firm Caceis. Olympia has USD69bn of assets under administration.
Analysts expect private equity deals to gather momentum post summer. Spooked by the severity of decline in the sub-prime market, investors are staying away from debt markets. As a result, some 20 financings for leveraged buyouts had to be pulled or snagged, including a USD12bn debt offering for Chrysler Group's spin-off last week. Banks are offering higher returns to attract debt investors. Not only that, the recent decline in equities could further spur mergers and acquisitions.
Private equity leaders testified on US Capital Hill earlier this week as lawmakers consider a bill that would more than double carried interest taxes. Among those scheduled to testify were Bruce Rosenblum, managing director of Carlyle Group and head of trade lobbying group Private Equity Council.