Australian Basis Capital Fund complains of guilt by association.

July 19 (Bloomberg) — Basis Capital Fund Management Ltd., an Australian hedge fund caught up in the rout in U.S. subprime mortgages, suffered losses as early as February.

In a letter sent to investors July 6, Basis Capital said its investments in collateralized debt obligations, or CDOs, had been tarnished by “guilt by association.” Less than a week later, the Sydney-based hedge fund, which had assets of $1 billion in May, said its two funds lost 9 percent and 14 percent last month. Withdrawals from the funds have been frozen and some margin calls have been missed, research firm Zenith Investment Partners Ltd. said in an e-mailed note today.

MarketWatch has more on the Basis fund misses margin calls story.

Basis Capital, a firm with more than $2 billion in assets that was named Australian hedge fund of the year in 2006, has become the latest to be hit by turmoil in the subprime mortgage market.

The Basis Yield Alpha Fund (Master) has failed to meet margin calls and some of its lenders have declared the fund in default and are trying to seize its assets, Zenith Investment Partners, a research firm, wrote in a report on Thursday. Zenith’s report cited a notice that Basis Capital sent to investors on Wednesday.
Basis warned that if its lenders seize assets of the Basis Yield fund and sell at “distressed sale prices,” the net asset value of the fund could be halved compared to its May 31 level, Zenith’s report said.

Basis Capital, founded in 1999 by Steven Howell and Stuart Fowler, didn’t return a phone call and an e-mail seeking comment on Thursday morning. Zenith also didn’t return a call and an e-mail.

Merrill Lynch (MER) is the fund’s prime broker, according to Basis Capital’s Web site. A spokeswoman for the investment bank declined to comment.

After missing margin calls, the Basis Yield fund is negotiating with creditors and has appointed accounting firm Grant Thornton to help with an orderly sale of assets at prices which reduce the losses to investors, Zenith’s Thursday report said, citing Basis’s July 18 notice to investors.

Letter To Investors

Subprime crisis – the Basis Capital letter to investors

DISCLOSURE NOTICE

BASIS YIELD FUND (ARSN 107 898 048)
Basis Capital Funds Management Limited (ACN 092 478 441) as the responsible entity of the Basis Yield Fund (”Fund”) advises that the Basis Yield Alpha Fund (Master (”Master Fund”) in which the Fund indirectly invests most of its assets has liabilities to its financiers secured over most of its assets. The financiers have reduced their valuations of those assets as a consequence of the disruption in US credit markets following concerns in relation to sub-prime residential mortgages and have made margin calls. The Master Fund is in default in meeting some margin calls which has resulted in a number of its financiers declaring events of default. Some of the financiers are seeking to realise their security over the Master Fund’s assets. As there is no liquid market for many of these investments there is a serious risk of substantial losses in the Master Fund as the prices obtained by financiers may be significantly below the book value in the Master Fund’s accounts as at 31 May 2007.

The Master Fund is negotiating with its financiers and has appointed the accounting firm Grant Thornton to assist it to do so in an attempt to achieve an orderly sale of assets at prices which reduce the losses to investors. However, it can not control the exercise by financiers of their enforcement rights. …..

The key idea here is that Basis Capital Fund was over leveraged in assets with “no liquid market“. There is going to be a round of lawsuits over this idea. But the bottom line is that Basis Capital was rolling the dice with OPM (other people’s money) just as Bear Stearns did, and the dice came up snake eyes.

The Bright Side

Basis Fund investors might lose only 50% of their money. Investors in Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund are worthless as noted in The Alt-A Word.

J.P. Morgan Chase (JPM), Citigroup (C), Morgan Stanley (MS), Goldman Sachs (GS), and Bear Stearns (BSC), and Deutsche Bank (DB), are creditors to the fund according to the Financial Times. No doubt all of the above are scrambling like mad to get their money while there is still anything to get (tough luck for Basis Capital Investors).

Click on any chart in this series for a sharper view.

JPM

C

MS

GS

BSC

DB

Except for BSC which already has busted both its weekly trendline as well as the 50 day exponential moving average (EMA) the key question in relation to the other charts is “Will these 50 EMAs hold?”. If not, and fundamentally there is no reason they should with subprime contagion clearly spreading, look for a test of the 200 EMAs (at a minimum).

Creditors having learned a lesson watching the Bear Stearns hedge fund go to zero and may start acting quicker. The implication to those in leveraged hedge funds should be obvious: Get out ahead of trouble while you can (if you can). If you wait until you need to get out, it is simply too late. More and more hedge funds and pension plans are going to be finding out “It’s Already Too Late”.

Mike Shedlock / Mish/