Funds News

Thames River hedge fund manager goes long subprime

LONDON (Reuters) - Thames River fund manager Ken Kinsey-Quick has moved long some battered subprime assets after shorting the sector last year, because he thinks they are cheap, and also hopes to make money out of a fall in commodity prices.

Kinsey-Quick, who runs around $2.3 billion (1.2 billion pounds) in fund of hedge funds and who made money last year by having up to half of his assets in funds that were short subprime as the U.S. mortgage crisis unfolded, said he had invested at the start of this month in a fund specially set up by one fund manager.

Shorting means betting on a lower price for a security in the future.

“Everybody hates the word subprime. You bring it up and it’s a dirty word, nobody wants to discuss it,” Kinsey-Quick said in an interview late on Wednesday. “Everybody’s just dumped it.

“You can get a high IRR (internal rate of return) out of these things by buying up some of these pools.”

Prices are now too low relative to expected default rates, he said.

Since the U.S. subprime crisis began last summer, many subprime-related securities assets have plunged in value, some to less than 10 cents in the dollar, as investors worried about rising defaults and the ratings assigned to some securities.

Kinsey-Quick said he had allocated 1-1.5 percent of assets to the fund, which he declined to name as it was not fully invested yet, and which draws down cash from Thames River as it finds opportunities in this area.

He said he had not invested more in order to avoid potential short-term mark-to-market losses for his portfolios if prices fall further, but said if this was the case he may increase his allocation.

“Something looks cheap ... and you think ‘I’ve just got to buy a bit of that’, and in the meantime it just gets cheaper,” he said.

“You’ve got to watch out in the short-term for falling knives. Now’s not the time to take a shotgun approach and just go big and invest everywhere. But if you take that rifle shot approach and pick off a couple of real exceptional opportunities, you can find them out there.”

He said he retained around 5 percent of assets in a fund that is short the subprime sector and whose bets are set to mature in August.

Kinsey-Quick also said he believes commodities are in a bubble and said he was investing with one fund manager who was shorting some commodity futures.

“I think commodities is a bubble ... Prices of commodities have been driven by financial investors and by money flows and not by fundamentals.”

His views stand in sharp contrast to those of some hedge fund managers, for instance Eclectica’s Hugh Hendry, who argues that pressure on corn supplies to manufacture ethanol biofuel has reduced availability of corn for food. Many managers also point to rising demand from emerging markets.

“Yes, China is consuming more,” said Kinsey-Quick. “That (biofuel pressure and rising demand) is probably 20 percent (of the) increase in the price, it’s not 150 percent (of the) increase in the price.”