Funds of hedge funds start to show impact of sub-prime trading

Date: Wednesday, August 22, 2007
Author: Alan O'Sullivan, Citywire.co.uk

The meltdown in US sub-prime lending is certain to have an impact on UK fund of hedge funds, analysis of recent performance shows.

Although it is too early to say which of the funds has been hit, research from WINS Investment Trusts highlights two funds that have stood on either side of the sub-prime dividing line.

One of the best-performing funds of 23 in the sector is Thames River Hedge Plus. Managed by Ken Kinsey-Quick, the fund saw its net asset value (NAV) soar after it took a timely investment in Paulson Credit Opportunities, a hedge fund that shorts the US sub-prime market, at the end of last year.

As a result, it has a three-month NAV growth of 7% in comparison to the average fund of hedge fund’s 3.8%. Its share price rose over 5.3% over July, while the average share price of funds in the sector fell by 0.1%.

However, the KGR Asia Dynamic fund shows the potential pitfalls. Like other funds it has profited from investments in Asia. Its three-month NAV grew 5.6%, but its share price fell 3.1% in July after it announced it was pulling out of an Australian fund called Basis Pac RIM, which itself had a 15% exposure to the US sub-prime market though a sister fund.

Richard Scott, manager of the Iimia Growth and Income fund, said: ‘It will be some time before we see the full knock-on effects of these esoteric debt instruments; it’s hard to tell their true value because of liquidity issues.’