Blue Planet hedge fund cuts bets

Date: Monday, August 13, 2007
Author: Laurence Fletcher, Reuters.co.uk

LONDON (Reuters) - Market turmoil caused by the U.S. subprime meltdown could mark the start of a financial crisis, said Scottish fund firm Blue Planet Investment Management, which has removed most of its hedge fund's long and short bets.

"I think we are at the start of ... almost a financial crisis, on a big scale," Kenneth Murray, chief executive and head of investments at Blue Planet, which specialises in investing in financial companies, told Reuters on Friday.

"A lot of people will tell you it will be over in a week or two. It won't. It's just started."

The FTSE 100 <.FTSE>, which three weeks ago was trading above 6,600, closed down 3.7 percent on Friday at 6,038.3, its biggest fall in more than four years.

The fall ends a volatile week for both stock and credit markets, amid fears a surge in U.S. subprime defaults will lead to a wider financial crisis.

Murray said his Global Financials Hedge fund had removed most of its long and short positions and had built up cash. Shorting means betting on a lower price for a security in the future.

"We've effectively shut the thing down, we don't like what's going on ... In 25 years I've never seen volatility like this," he said.

In his long-only funds, meanwhile, he has removed borrowing and protected two-thirds of his portfolios by buying futures contracts on the DJ Euro Stoxx 50 <.STOXX50E> index.

He said his funds have no exposure to investment banks or banks with capital market activities, and instead favour retail banks in Russia and Poland, which he believes will be less affected by the subprime fallout.

"The real risks of the banks are the pipelines ... In particular they've been providing bridging loans which they pass on to other banks, but other banks don't want to take them.

"If central banks cut interest rates the problem does not go away."

Blue Planet Global Financials Hedge fund's net asset value fell 3.12 percent in July after some of the fund's shorts in areas such as U.S. investment banks failed to pay off.

"The main problem was the shorts ... One minute you're up a lot of money, the next minute you're down a lot of money. These are colossal movements."