United Capital limiting fund withdrawals
Hedge fund operator United Capital Markets Holdings Inc. said Tuesday that it was limiting withdrawals from its funds -- some of which invest in bonds backed by sub-prime mortgages -- to prevent a forced sale of assets.
“We have received an unusually high number of redemption requests,” United Capital, based in Key Biscayne, Fla., said in a statement.
One investor wanted to withdraw about a quarter of the funds’ assets under management, the firm said.
Neither United Capital nor its funds, including the money-losing Horizon ABS funds, are being liquidated, the firm said.
The firm managed $620 million in assets on March 31, including $266 million in the Horizon ABS funds, United Capital said in April in a letter to investors.
John Devaney, United Capital’s chief executive, said this year that his strategy was to buy bonds backed by sub-prime mortgages and other asset-backed securities when they had fallen out of favor.
Prices on such investments tumbled this year amid an increase in home-loan defaults; losses on sub-prime bonds might total $90 billion, analysts at Deutsche Bank said last week.
Devaney, 37, “prides himself as a risk taker, someone who sticks himself out there,” said David Castillo, who trades asset-backed securities at Further Lane Securities in San Francisco.
The decision by Devaney follows the collapse of two hedge funds run by Bear Stearns Cos. Those funds failed as their $10 billion in borrowings magnified falling values for high-rated bonds linked to risky mortgages. The problems of the Bear Stearns funds contributed to a “dramatic widening” of risk premiums on the types of bonds owned by United Capital’s Horizon funds, the Florida firm said. In other words, the yields on bonds held by United Capital rose relative to the yields on less risky bonds. The likely result was a decline in the value of the riskier bonds.
Horizon Fund, Horizon ABS Fund, Horizon ABS Fund Ltd. and Horizon ABS Master Fund Ltd. will continue operating, as will United Capital’s asset management business, the firm said.
The funds “greatly lowered” their leverage last month by selling securities and closing out of positions in derivatives linked to defaults on sub-prime bonds, the statement said. United Capital said it now viewed such credit derivatives as highly volatile and had stopped trading them.
The Horizon ABS offshore fund, which gained almost 40% last year, fell 5% in the two months that ended May 31, data compiled by Bloomberg show. That was before the public turmoil of the Bear Stearns hedge funds that are being liquidated.
In April, 12% of sub-prime mortgages in bonds were late by at least 90 days or were already defaulted on, according to Friedman Billings Ramsey Co. in Arlington, Va. That’s up from 5.4% in May 2005 and is the highest since 1997.
Sub-prime home loans are given to borrowers with poor credit or high debt, and usually then are packaged into bonds. Those bonds are often repackaged into complex products known as collateralized debt obligations, which Devaney also bought.
Devaney, a former trader at Miami-based brokerage Capital International Securities Group, founded United Capital in 1999 as a broker-dealer specializing in low-rated and distressed asset- backed bonds and various types of mortgage securities.
