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Another One Bites The Dust

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Peloton to Liquidate ABS Fund After Mortgage Losses (Update2)

By Katherine Burton and Tom Cahill

Feb. 28 (Bloomberg) -- Peloton Partners LLP, the London- based hedge-fund firm run by former Goldman Sachs Group Inc. partners, is liquidating its ABS Fund after ``severe'' losses on mortgage-backed debt and demands from banks to repay loans.

Peloton, founded by Ron Beller and Geoff Grant in 2005, is seeking buyers for the $1.8 billion fund's assets, according to a letter sent today to investors. Firms including Citadel Investment Group LLC and GLG Partners Inc. have made bids, two people familiar with the situation said.

The fund's demise after an 87 percent gain last year highlights the severity of the U.S. subprime-mortgage collapse, which has spread to AAA-rated securities and triggered bank margin calls. Boston-based Sowood Capital Management LP shut down last year after losing $1.5 billion. Two funds managed by New York-based Bear Stearns Cos. filed for bankruptcy.

``The rubbish goes down first and then the good stuff is pulled down with it,'' said Nigel Blanshard, a partner at London-based Culross Global Management Ltd., an $800 million fund that invests in other hedge funds and isn't a Peloton client. ``The flight to quality this year has been to get out of mortgages altogether.''

Peloton froze redemptions from its $1.6 billion Multi- Strategy Fund, which has a ``very large position'' in the ABS Fund, according to a separate investor letter. The investment was about $500 million, according to one investor.

Sudden Fall

``The problems for the Peloton ABS Fund have had a serious negative impact on the Multi-Strategy Fund and we are currently assessing our options,'' the letter said.

Grant, who works in Santa Barbara, California, declined to comment. The ABS Fund is managed by Peter Howard and David Watson, who weren't immediately available for comment.

The ABS Fund, which was named the best new fixed-income fund of 2007 in January by EuroHedge magazine, almost doubled last year on what Beller called a ``world-coming-to-an end'' trade that debt linked to subprime loans would tumble and higher-rated securities would rise.

``Our shorts last year were largely in subprime and our longs in prime assets,'' Beller, 45, said in a Jan. 25 telephone interview. ``We just benefited from the sharp drop in subprime and feel well positioned going forward as we expected our longs to continue to perform and our shorts to continue to deteriorate.''

A short sale is designed to profit when the security falls in value, while a long position is a bet the security will rise.

Market Declines

A month later, ``challenging credit markets'' and margin calls from banks led to the decision to wind down the ABS Fund, Beller and Grant said in the letter to ABS Fund investors, a copy of which was obtained by Bloomberg News.

The most-senior AAA securities backed by so-called Alt A mortgages, which are closer to prime than subprime in terms of expected defaults, have ``cheapened dramatically the past few weeks,'' UBS AG analysts wrote this week. Prices are about 8 cents per dollar less than comparable bonds backed by government-linked entities such as Fannie Mae, compared with 4 to 5 cents less in late January.

The benchmark ``agency'' mortgage securities have also declined, with Fannie Mae's 5 percent 30-year fixed-rate bonds falling from 100.66 per dollar of principal on Jan. 22 to 97.75 today, according to data complied by Bloomberg.

Stick With Success

At New York-based Goldman, Beller headed the fixed-income, currency and commodity sales groups in Europe, and Grant, 47, oversaw the global foreign exchange business and was co-head of the firm's macro proprietary trading group. After Beller left Goldman in 2001, he worked for a year reorganizing New York City's school system.

Peloton, which is named after a bicycle-racing formation in which riders work together to increase their speed, held its profitable trades into this year because it was confident they would continue to advance, according to a December report to investors in the Multistrategy fund, a copy of which was obtained by Bloomberg News. The fund gained 27 percent in 2007.

``We believe there is substantial profit potential built into our portfolio and expect plenty of opportunities to augment this through opportunistic trading around our core positions,'' the report said.

``We have recently fielded questions from ABS investors about `the trade' in 2008 and are confident we already have it on,'' the report said. ``As each month passes, this will become increasingly evident as our senior securities amortize at par while our subordinate shorts start receiving writedown payments.''

So even the Ubermensch from Goldman Sucks **** it up, what hope for the rest? :lol:

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  • 293 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
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