Endeavour Capital Falls About 28% on Japanese Bond

Date: Wednesday, March 19, 2008
Author: Saijel Kishan and Tom Cahill, Bloomberg.com

March 19 (Bloomberg) -- Endeavour Capital LLP, the London- based hedge-fund firm founded by former Salomon Smith Barney Inc. traders, has fallen about 28 percent this month because of ``extreme volatility and vast moves'' in Japanese bonds, according to two investors.

The $2.88 billion Endeavour Fund sold ``substantially all'' of its Japanese government debt this week, Chief Executive Officer Paul Matthews said today in an interview. He declined to comment on the March decline.

Endeavour seeks to profit from discrepancies in the prices of various fixed-income securities and currencies, a strategy known as relative-value trading. The fund lost money as the spread, or difference, between yields on Japanese 7- and 20-year bonds widened to 1.44 percentage points on March 17, the most in almost nine years. Investors bought shorter-term debt as the benchmark Nikkei 225 stock index fell 13 percent in March.

``You've had a confluence of events that has led to extreme volatility and vast moves'' in Japanese government debt, said Matthews, 47, a former head of global fixed-income arbitrage at Salomon Smith Barney. ``The relative moves we've seen in Japan are not in the realm of anything we've ever seen for Japanese government bonds.''

Endeavour was set up eight years ago with $250 million by Matthews, and Paolo Kind, 54, who was previously the head of research and risk management for global fixed-income arbitrage at Salomon Smith Barney, now part of New York-based Citigroup Inc.

`Painful Experience'

They told investors the fund may borrow as much as $20 for each $1 in capital to boost returns and may experience wide swings in value, according to marketing documents obtained by Bloomberg News. The documents said managers would seek to limit risk so no one position would result in a loss of more than 20 percent.

``It's been a painful experience and we will have some disappointed investors,'' said Matthews. ``We need to prepare for withdrawals in coming months and run lower risks and balances.''

He said the fund hadn't yet received redemption notices. Requests are due 60 days before the next redemption period at the end of June, he said.

Endeavour's investment team also includes George Polychronopoulos, 44, a former head of fixed-income trading at Bear Stearns Cos., and Domenico Veronese, 39, who had been a director at Barclays Capital's European bond-trading unit.

The Endeavour Fund gained 11 percent last year. That compared with the 8.85 percent average return for relative-value funds, according to Hedge Fund Research Inc. in Chicago. It returned 0.74 percent through February, according to an investor letter, compared with an average decline of 0.23 percent by peers.

More Losses

The fund seeks to generate annual returns of about 7 percentage points more than the London interbank offered rate, or Libor, according to the marketing documents. Three-month Libor rates averaged 5.29 percent last year, according to data compiled by the British Bankers' Association.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.

At least 10 hedge-fund managers including Sailfish Capital Partners LLC in Stamford, Connecticut, and London-based Peloton Partners LLP have been forced to liquidate or sell assets as banks and securities firms tighten lending following the collapse of the U.S. subprime-mortgage market.

``We're experiencing a massive de-leveraging event,'' said Gina Sanchez, who manages about $4.2 billion for the California Endowment in Los Angeles. ``We're really going to find out who has actually been hedging and who has got too much leverage on. There's going to be more blowups.''

``As long as we have the support of our banks this is survivable,'' said Matthews.

To contact the reporters on this story: Saijel Kishan in London at skishan@bloomberg.net; Tom Cahill in London at tcahill@bloomberg.net.