Reply #14: Hedge funds hit hard by subprime woes

[Tellurian]

The limited partnership investment funds are much more exposed to the high-risk loans than mutual funds.

March 16 2007

BOSTON (Reuters) -- Hedge fund portfolios seem to be suffering the most within the fund industry from turmoil in subprime lending, as most mutual fund investors have so far escaped big losses, industry analysts and investors said.

"This is probably a case where the tail is wagging the dog," said Jeff Tjornehoj, an analyst at fund research firm Lipper, a unit of Reuters. "The people taking the biggest hit seem to be the hedge funds, and their nervousness is spreading through the markets; but so far most mutual funds do not look to be heavily impacted," he added.
Video More video
The subprime mortgage market is heading for a meltdown with some major lenders defaulting on current financial agreements. CNN's Gerri Willis reports. (March 10)
Play video

The value of the average stock mutual fund, which could own anything from financial companies to home builders, slipped 0.4 percent in the week ended Thursday, Lipper data show. In the previous week they were off 0.3 percent, but for the year to date, they are still nearly flat - off only 0.03 percent. Hedge fund data is not available on a weekly basis.

"On the other hand, a small number of hedge funds exposed to the mortgage-backed securities and some subprime lenders, may be nursing bigger losses, people who track performance in the $1.4 trillion industry said. And their problems - real or perceived - make for daily conversation, fund of fund investors and performance trackers said.

Hedge fund Second Curve Capital invested in subprime lenders, and people who track performance said losses were in the double digits through February. The fund's manager did not respond to an earlier email request about the performance.

Greenlight Capital had owned a chunk of New Century - the nation's largest independent subprime lender. which has seen its stock tumble roughly 95 percent in less than a year - and its manager was on the board until earlier this month.

Through the end of February, the fund was off 2 percent, an investor said.

"If there is someone out there who is levered and has concentrated bets, they could have a big problem," said Charles Gradante, principal at hedge fund investors and consultants Hennessee Group.

"But I imagine if there were some fund on the verge of blowing up in a big way, we would have heard about it by now."

Even on the mutual fund side, some investors who made concentrated bets in financial services or even real estate funds, where builders' stocks have been hit amid the slowdown in the housing market, are nursing bigger losses.

On average the $10.6 trillion mutual fund industry's 131 financial services funds fell 1.53 percent during a week markets when were spooked by economic data that showed higher default rates, regulators began probing rosy reports on subprime lenders, and lawmakers promised new bills to reign in aggressive lending. Last week they were off 0.4 percent. Real estate funds lost 0.31 percent this week after falling 1.8 percent in the previous week.

The $350 million Fidelity Select Banking Portfolio - which owned shares of Countrywide Financial (Charts) and more regionally oriented names like Wachovia (Charts), according to its latest holdings data through year-end - is off 3.64 percent this year. The fund pared some losses this week.

Losses at the $274 million FBR Small Cap Financial Fund are even deeper at 7.7 percent because market jitters hurt even the small bank stocks with conservative portfolios that the fund's manager prefers, Morningstar analyst Andrew Gunter said.

Countrywide, which has lost roughly 16 percent this year, also hurt diversified stock funds like Legg Mason's Value Trust fund, now off 2.9 percent. The fund - managed by Bill Miller, who is the only man to beat the broader Standard & Poor's 500 stock index 15 times in a row, also owned homebuilder stocks which fell, according to the latest available data.

http://money.cnn.com/2007/03/16/markets/hedge_subprime.reut/index.htm?postversion=2007031615