SYDNEY — Volatility in global credit markets has hit another Australian high-yield fund, Macquarie Bank Ltd.'s Fortress Investments Ltd., which said late Tuesday that investors in the funds face losses of up to 25%.
Fortress is the third fund manager in Australia to flag serious problems and is the latest sign that the fallout from U.S. subprime mortgage sector woes is spreading ever wider.
Australia has the largest hedge fund industry in Asia, according to the Australian government, and Australian hedge funds have been some of the first to say that the global widening in yield spreads has cut deep into their value.
Fund watchers say that as niche funds heavily exposed to U.S. credit markets assess their value at the end of July, more may report significant falls in value.
Investors in Fortress had put in A$220 million, which was then leveraged to create a fund of between A$1.2 billion and A$1.3 billion, according to Fortress.
The funds weren't directly exposed to U.S. subprime mortgages, but problems in that sector have pushed down the value of riskier investments in credit markets generally.
The problem is that as the value of the securitized loans in the fund has fallen, Fortress has had to sell some of its assets in order to meet covenants on the borrowings it has.
The director of Macquarie Fortress Investments, Peter Lucas, said in a statement that the average price of assets in the portfolios had fallen by 4% in June and may have fallen a further 20% to 25% in July, so the funds face possible margin calls from their lenders if they aren't able to sell enough assets to reduce leverage.
Macquarie Bank doesn't have any direct exposure to the funds, a spokeswoman said. Still, Macquarie Bank shares fell sharply in morning trade amid concerns its business model could be hit by the fallout in credit markets.
At 0055 GMT, Macquarie Bank shares were down 7.1% at A$76.70, weighing on the broader market, which was off 1.5%.
There was also some concern about the fund's woes impacting Macquarie's reputation.
"It's caused another hit on sentiment, but as they've said, they haven't lost their own money," said one senior trader.
Los-Angeles-based Four Corners LLC, which is 66.7% owned by Macquarie Bank, manages the Fortress funds' portfolio. Four Corners wasn't immediately available to comment.
Fortress funds' sharp fall in value follows moves by Basis Capital and Absolute Capital to freeze investors' money due to the fall in value of their investments. The funds are invested in senior secured U.S. corporate loans.
Lucas said the underlying assets are fundamentally healthy, there have been no defaults in the portfolio, the loans should continue to pay interest and the principal should also be repaid. But there are "supply/demand imbalances in the senior loan market."
Fortress said it was in talks with selected investors regarding a potential investment in the underlying portfolio to support the fund and help avoid breaching its leverage facility.
"There's a perception that credit markets generally have overreacted and there's some very good value there," Lucas told Dow Jones Newswires.
"We are being approached by investors saying, 'We think this is a good time to be buying' because the overriding factor here is that we think all of the loans we own in the portfolio will repay their principal and interest when due," Lucas said.
Funds management researchers in Australia say that the country's large, diversified funds may suffer falls in the value of their investments linked to U.S. subprime mortgages and collateralized debt obligations. But strong capital gains in other sectors will more than offset this.
"There are about 100 hedge fund managers in Australia and the vast majority have a long-short equity strategy.
"More generally, less than 1% of Australian funds under management would be allocated to structured credit," said Alex Dunnin, head of research at Rainmaker Information.
