Asset Alliance sues Beacon Hill for $500 million

Asset Alliance had a 50% investment in the hedge fund, which lost around $400 million from positions related to US interest rates movements last October. The company, which also advises on $534 million of investor assets, is claiming the money on the grounds of lost investment, as well as for loss of business and damage to its reputation.

The arbitration claim was originally filed in January, but has only recently become public after Beacon Hill's lawyers filed a plea for legal fees to be paid on their behalf. According to a spokesman for Asset Alliance, Beacon Hill is currently attempting to delay the arbitration.

Beacon Hill was hit by the unprecedented wave of refinancing activity that occurred in the US last year. With interest rates reaching record lows, mortgage holders were able to lock into lower interest rates by exercising the call option embedded in their mortgages. This in turn hit investors in mortgage-backed securities, including mortgage agency Fannie Mae, which had to refund the mortgages at lower yields.

Beacon Hill is thought to have exacerbated its losses by shorting 10-year government bonds, in the hope that interest rates would begin to rise and allow it to recoup money on US Treasuries. In effect, this doubling-up bet, which went contrary to what Fannie Mae and others were doing, backfired, as US interest rates have remained at historical lows.

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