Subprime risks come home to roost for hedge funds

By Al Yoon - Analysis

NEW YORK (Reuters) - Bad bets revealed by some hedge funds in recent weeks may mean other funds will be forced to accept the market's deteriorating views on subprime mortgages and report their own losses soon.

Some managers have resisted accepting market views on their assets, claiming declines represent short-term market volatility and not underlying financial value in their subprime bonds, analysts said. Since the bonds trade infrequently, managers' have turned to pricing models that may ignore market sentiment, buoying prices.

But with delinquencies rising on mortgages granted to less creditworthy home buyers, and the U.S. housing market slump seen extending into 2008, dealers are increasingly accepting the reality of market values.

Declines in indices tracking the values of subprime mortgage backed bonds in June mean managers valuing portfolios on a monthly basis have to reveal losses, analysts said.

"The interesting thing is the varying stages of denial that the street finds itself in," said a university endowment manager who asked that he not be named. Some, he said, are "very willing to mark prices down and take the lumps."

Braddock Financial Corp. on Thursday said it will liquidate the Galena Street Fund after news and losses led investors to draw down the fund by a quarter. Losses at the $300 million Galena Street Fund, a leader in its hedge fund category in recent years, came as its managers marked their holdings down to market levels, using models provided by its Wall Street dealers.

United Capital Markets' halted redemptions on its Horizon Funds group after investors also demanded their money back.

Earlier in June hedge funds run by Wall Street investment bank Bear Stearns Cos. BSC.N reported losses on leveraged investments in subprime bonds.