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United Capital Markets, the Key Biscayne, Florida-based broker-dealer, halted redemptions from its Horizon ABS Fund LP on Friday, said a sellside source and two buyside sources. The hedge fund took losses on subprime positions related to the subprime ABS market and the ABX, the synthetic index referencing US subprime mortgage bonds, according to the sources.
Representatives for Horizon attempted to sell assets at an accelerated pace in recent weeks, said two buyside sources. The fund has roughly USD 560m in assets under management and USD 900m in investments, according to a source close to United Capital. Leverage at the fund has ranged from 1.5x-2.5x and is currently around 1.5x after recent sell-offs, according to the source. The fund has 12 rep counterparties, the source said.
Given depressed prices for subprime ABS, Horizon won’t likely hold a firesale of assets, said both buysiders. The buyside sources estimated the firm would slowly unwind its holdings over the next six months, depending on negotiations with repo counterparties. Among UCM’s recently offered bonds include USD 50m–USD 70m face value in subprime second lien securities, according to one of the buyside sources. The source estimated the value of the portfolio at 40-50.
Horizon is not liquidating, the source close to United countered. The company froze redemptions after a flood of investors spooked by the negative state of the subprime lending industry tried to pull their money from the fund, he added.
But according to one of the buyside sources, losses on cash subprime holdings and a sizeable long position in the ABX triggered the wave of redemptions. The fund bought the index earlier this year and had been earning a monthly premium on the index of more than Libor+ 100bps, the source said. But the recent selloff of the ABX left Horizon on the wrong side of the trade, the buysider added.
The 07-1 BBB- piece of the index reached a low of roughly 62 in late February before climbing to roughly 73 in mid-May, according to Markit Group. Continued news of deteriorating credit conditions in the subprime mortgage market and the partial unwinding of two Bear Stearns-affiliated hedge funds sent the index spiralling lower to reach its all-time lows in recent weeks.
The 07-1 BBB- piece of the ABX closed at 54.06 today and hit an intraday low of 51, according to Markit and another sellside source. Speculation about the state of the Horizon fund circulated for weeks but talk of the redemption freeze pushed the index two points lower, said one of the buyside sources.
The fund launched on 1 February 2006 and focused on investment grade, non-investment grade, subordinated and distressed ABS. Investments included CDOs, CMBS, CMOs and CDS and other derivatives related to the ABS market, according to documents reviewed by Debtwire.
Horizon posted its first negative month in April, when it was down 2.15%, according to the documents. Recent liquidations by the fund include subprime and aircraft asset-backed bonds, said one of the buysiders.
United Capital was founded in 1999 by John Devaney and made its fortune purchasing and repackaging such esoteric assets as aircraft lease securitizations and manufactured housing bonds on the cheap. Devaney expressed bearish views on the subprime mortgage market as recently as February when he compared investing in the bonds to “dancing on the edge of a razorblade,” at an industry conference in Las Vegas.
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