21
Jun

The Bearn Stearn fund story

Escrito el 21 Junio 2007 por Juan Toro en Financial Markets

Two hedge funds set up by Bearn Stearn are in trouble. These are the High-Grade Structured Credit Strategies Enhanced Leverage Fund, together with a sister fund. They are funds that mainly invested in collaterized debt obligations (CDOs), specifically in mortgage backed securities. The sub-prime rout of two months ago has hit heavily the valuation of these two funds. The funds reported losses of around 6.75 % at the end on April. Two weeks later they released another report that showed losses of 18 %. This got nervous many fund investors that started requesting early redemptions. Gates were closed and this made investor even more nervous.

Events are evolving as usual in a fund shutdown crisis. The funds were deeply leveraged to enhance yields. Margin calls come quickly when losses are amplified because of the leveraged positions, which them leads to liquidation of part of the collateral at low prices. All these things are currently happening to these funds. But some new things are special about this crisis that could be lessons for the future. One of the specific things about funds investing in these very illiquid products is the lack of prices to calculate net asset values (NAV). Prices for some CDOs are not posted continuously and people have to rely on proprietary models of valuation. This has many drawbacks. First, one of the problems is obviously the wrong incentive from the manager

Comentarios

gurusblog 23 Junio 2007 - 20:10

Algo me dice que el invento de los CDOs y los CLOs que compran deudas de alto riesgo (subprimer, o deudas de buy outs) no acabar

Juan Toro 26 Junio 2007 - 23:17

Biggest problem is valuing the debt. Very difficult for such an illiquid asset. Things are getting worse with a stress situation like the current one. CLOs made the front page today on the Wall Street Journal as an additional worry. As you said all C-debts look scary.

[…] el día que menos los esperemos se puede caer el castillo de naipes.Más sobre el tema en este post del Finance weblog del IE.[tags] Hedge Funds, CLOs, CDOs, Bearn Stearns[/tags] window.___gcfg = […]

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