Investors fret as Eden Rock fund falls

Date: Wednesday, August 19, 2009
Author: Martin de Sa'Pinto, Reuters

* Fund equity shrinks in 2009 on hedging costs, poor markets

* Estimated net asset value fell to around $640 mln in July

* Wind down will take until 2011 and beyond

Eden Rock Structured Finance has seen its value drop further in 2009, leaving some investors saying they are worried they may get back little of their money in the hedge fund, which is due to be wound up after losses last year.

Lack of foreign exchange hedging pummelled the fund's asset values by up to 8.5 percent in July, according to preliminary company estimates seen by Reuters.

Investors told Reuters this week that with asset and loan-to-equity values worsening, they were concerned they would get back far less than half their original investment.

Reuters telephoned Eden Rock repeatedly to ask about the fund, but executives did not return calls.

UK-based Eden Rock said at the end of October it would wind down the fund after falling asset prices, investor withdrawals and exposure to an alleged fraud took their toll.

The fund invested 75 percent of its assets in asset-based lending (ABL) strategies, and could use up to 50 percent leverage, Eden Rock documents show. This leverage had to be reined in when the value of the portfolio funds fell.

Some of these funds were hit by an alleged $3 billion scam orchestrated by Minneapolis entrepreneur Tom Petters, charged with a fraud similar to that in the Madoff case.

ILLIQUID

Eden Rock estimated the value of the portfolio at some $900 million in October, but after accounting for $440 million in borrowing plus credit redemptions, unpaid redemptions and reserves, the residual equity was then just $219 million, according to a company document obtained by Reuters.

An Eden Rock document sent to clients in August shows the value of assets slumped to around $640 million by the start of July, as foreign exchange movements decreased the value of assets, but does not give a value for residual equity.

The document says the fund will liquidate most of its assets during the next two-and-a-half years, but that about a quarter of the assets will take longer to wind down.

Investors have been reluctant to tie their money up in illiquid strategies like ABL since the alleged Petters fraud and the Lehman and Icelandic banking crises, and the value of many assets has fallen sharply.

When equity is insufficient to support the capital base of a fund, the lender can take over the fund and liquidate its assets. This happened to Bluecrest's Specialty Asset Finance fund, when troubled Belgian bank KBC (KBC.BR) terminated its liquidity facility in July [ID:nL2230878].

A spokeswoman at Fortis Bank, Eden Rock fund's lender, said the fund was not in liquidation and said this had been confirmed by Eden Rock.