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SRM hedge fund sees sharp fall

Date: Thursday, February 7, 2008
Author: James Mackintosh, Financial Times

SRM Global, the hedge fund that is Northern Rock’s largest shareholder, has fallen almost 50 per cent since it raised $3bn (£1.5bn) in Europe’s biggest hedge fund launch in 2006, according to investors, as a series of big bets turned sour.

The drop, mostly in the past three months, is a serious blow to the reputation of Jon Wood, the former UBS star trader and shareholder activist who runs SRM.

However, long lock-ups prevent investors withdrawing their money for a minimum of three years, leaving Mr Wood time to turn performance around without fear of redemptions until the autumn of next year at the earliest. Much of the money – reported to have included $500m UBS put in at launch – is locked up for five years.

According to investors, Mr Wood’s fund fell sharply in the final two months of last year to end down about 28 per cent for the year. It dropped further in January, with one investor putting the drop for the month at about 23 per cent. Bloomberg on Wednesday reported SRM had lost 30 per cent up to January 18, when the markets were near lows for the month.

SRM declined to comment.

The fund has a “high conviction” portfolio, with Mr Wood and his small team taking a handful of big positions, most recently a stake of just over 5 per cent in US mortgage lender Countrywide, where he opposes a bid by Bank of America. Other stakes have included Arcelor, the steel maker, where Mr Wood was involved in strenuous efforts to extract more money for minority holders after the purchase of a controlling stake by Mittal Steel.

More recently Mr Wood has been a vociferous critic of the Bank of England’s policy on Northern Rock, going so far as to attack Mervyn King, the governor, in a speech to an emergency shareholder meeting of the stricken bank.

Northern Rock shares rose sharply in January but remain less than half where they were in October when SRM’s stake was first disclosed. The stake has since been more than doubled to 10.77 per cent.

Still, investors say the Rock holding is relatively unimportant to the performance of the fund, and is held more as an option. “It is a binary trade,” one said. “It is either worth zero or is very profitable.”

Some investors also say they always knew the fund was high risk. “His positions are fantastic and very high conviction,” one investor said.