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Peloton ABS Master Fund, Multi-Strategy Fund - ABS Fund

2008-02-28

Count of distinct funds: 2
Capital base: $2B
Loss: ?

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stories: co.uk, co.uk, ft.com

Update: 2008-03-25:

Richard Wilson forwarded us some funny, educational material on Peloton.

Update: 2008-03-05:

The Times Online has reported that Peloton Partners will also be liquidating the Multi-Strategy Fund, which had been heavily invested in the ABS Master Fund. Per the Times:

Peloton Partners, the London-based hedge fund, is liquidating its two funds and shutting up shop.

The stricken firm last week admitted that it was being forced to liquidate its $2 billion (£1 billion) mortgage-backed ABS bond fund.

But it was hoped that a deeply discounted firesale could salvage its second, $1.6 billion Multi-Strategy Fund, despite the fact that almost half of that fund's assets were invested in the ABS Fund.

However, a source familiar with the matter said that the fund will be liquidated in the coming days.

2008-03-02:

TimesOnline has the graphic details of Peloton's implosion:

All mortgage bonds began to plunge in value. With Wall Street’s major banks still writing off bad debts at unprecedented rates, credit committees were looking for excuses to rein back their lending.

...

In the first few weeks of the year, Beller began to receive twitchy calls from his bankers.

With the value of the assets he held in his portfolio in free fall, the banks were tightening his credit terms. They were also demanding that the fund should put up more collateral to support its positions.

To meet these new terms, Beller began to sell some of the AAA mortgages in his portfolio...

The lesson seems to be that you should never underestimate an Austrian debt deflation... it's never just in one area; it is perfectly capable of extending to all credit markets. That, incidentally, includes the market of one's own margin debt.

Original Writeup, 2008-02-28:

From FT - Alphaville comes reports that Peloton Partners' ABS Fund has suspended redemptions and is being liquidated after seeing NAV values fall. The extenct of the losses at the ABS Fund have yet to be disclosed. From FT:

The fund, run by former Goldman Sachs partners Ron Beller and Geoff Grant, was known to be highly volatile, and posted an 87 per cent return last year on the back of a tough 2006. Peloton's $1.6bn multi-strategy fund was also up 27 per cent, thanks in part to its large investment in the ABS fund.

But 2008 has not been so kind. And prime brokers have tightened the vice. As a result, Peloton has also suspended NAV calculations and redemptions from the multi-strategy fund - the future of which also sounds in doubt. Judging by the tone taken below, there's more than a little bad feeling harboured against their bankers.

The article further includes a letter from Peleton Partners to investors of the multi-strategy fund (The one invested in the ABS fund being liquidated). In Peleton's own words:

As you may also be aware, the Peloton ABS Fund, which has delivered excellent performance since inception, has recently experienced difficulties in the challenging credit markets. Although there has not been any material deterioration in the credit quality of the Peloton ABS Fund’s assets, given the current liquidity situation in the asset backed securities market the Peloton ABS Fund has experienced severe NAV declines. In addition, because of their own well-publicized issues, credit providers have been severely tightening terms without regard to the creditworthiness or track record of individual firms which has compounded our difficulties and made it impossible to meet margin calls.

We have been working night and day exploring every feasible option to alleviate the situation. In the end the best solution has been to seek buyers and we have been actively pursing this option and many others in an effort to stabilise the situation.

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.In order to protect the interests of stakeholders, the Directors have determined to suspend the calculation of Net Asset Value, subscriptions and redemptions with immediate effect and until further notice.

Finally, we have some anonymous commentary with regard to Peloton Partners' choice to suspend NAV calculations on the ABS Fund:

You know the most interesting thing to me about this blow up is that they are suspending calculation of NAV, which I've never seen before. It is not that it hasn't happened much (don't know), it's just that it effectively screws your limited partners big time, since they in turn can't calculate their NAVs either, and it forces them to side pocket the investment. It essentially guarantees the fund management company is going out of business on ALL funds, since no one will ever invest with you again after you do that.

It will be interesting to see if our tipster's prediction holds true. If you hear more, please let us know!

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Important: This fund is on our list of hedge funds that have "imploded" (see also ailing lenders). However, please note that "imploded" is a somewhat subjective. The "imploded" list contains hedge funds (or other unregulated and autonomous speculative investment funds) which have gone through some sort of permanent adverse change. This is a somewhat subjective call, and does not necessarily mean total shutdown or bankruptcy. It can also mean steep and rapid mark-downs in net asset value; or abnormal "bail-out" by corporate parents or peers in order to avoid write-downs and provide liquidity. The funds are of any type and sector.