Myron Scholes' hedge fund dives in March

NEW YORK, April 10 Thu Apr 10, 2008 1:07pm EDT

NEW YORK, April 10 (Reuters) - Platinum Grove Asset Management, the $5.8 billion hedge fund group headed by financial luminary Myron Scholes, last month suffered its worst performance since inception amid turbulence in fixed income markets, the firm told investors this week.

Platinum Grove, which the Nobel Prize-winning Scholes founded in 2000 with other alumni from defunct hedge fund Long-Term Capital Management (LTCM), suffered an 11.37 percent drop for its domestic fund and 10.72 percent for its offshore sister fund, according to a letter the fund sent to investors on April 7.

The performance reflects the turmoil in the U.S. credit markets in March, when global interest rate and credit default swap spreads blew out to their widest levels ever after investors dumped mortgage bonds. Platinum Grove trades mostly interest rate swaps and sovereign debt.

The market turmoil also slammed hedge funds with similar fixed income strategies, such as JWM Partners' flagship Relative Value Opportunity fund, a $1.6 billion hedge fund founded by John W. Meriwether, another LTCM alumnus.

And Carlyle Capital Corp, an affiliate of buyout firm Carlyle Group, was forced to liquidate in March after it defaulted on $16.6 billion in debt, much of it in residential mortgage-backed bonds. London-based Endeavour Capital Management, founded by former Salomon Brothers fixed income trader Paul Matthews, also faced challenges.

Platinum Grove, formerly called Oak Hill Platinum Partners, didn't detail the reasons for its performance in the one-page note to investors this week.

But a person familiar with the company's performance said stabilizing fixed income markets are helping the firm recover, and the funds were up 2.6 percent in April as of last Friday.

In addition, the firm isn't suffering high levels of investor redemption requests or margin calls from its lenders, this person said. It was up about 3.2 percent in the first two months of this year, according to the March note to investors.

Platinum Grove declined to comment.

The firm's co-founder, Myron Scholes, has an illustrious career in academics and financial markets. He won a Nobel Prize in economics in 1997 with Robert Merton for research in the pricing of options and derivatives that formed the basis for the widely used Black-Scholes pricing model.

In 1994, he joined with Meriwether and Merton to establish LTCM with $1 billion of investor capital, but the firm spectacularly blew up in 1998 after the Russian debt crisis in one of the most high-profile hedge fund collapses ever. (Reporting by Dane Hamilton, editing by Gerald E. McCormick)

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