The fund had posted 87% returns last year through shorting subprime asset-backed securities (ABSs), but has suffered from the contagion in the ABS markets.
The fund has suspended the calculation of net asset value figures as well as halting subscriptions and redemptions while the fund is wound down.
The Peloton Multi-Strategy Fund, which has a "very large position" in the ABS fund, is also under review, according to a letter sent to investors yesterday.
In a separate letter regarding the ABS fund, the manager cites the fact that "credit providers have been severely tightening terms without regard to the creditworthiness or track record of individual firms" as a contributing factor and said that it had become impossible to meet margin calls.
An ABS trader at a European bank said the fund had been short subprime ABSs and long AAA prime, with a long exposure to the AAA ABX credit index as well. Prime residential mortgage-backed securities have fallen 10 basis points in the last week, while Wednesday saw a slump in the 07-2 ABX.HE AAA index, with a 2–5bp drop over the day's trading. The trader said this had been caused by market rumours of a fund offloading exposure.
The action has caused some market participants to question the efficacy of the crowded short subprime trade, and the attendant hedge positions that have been used. A part of the problem is that liquidity is currently so weak that even trying to unwind an ABX position as small as $15 million, for example, will move the market.
The week on Risk.net, July 7-13, 2018Receive this by email