Structured credit fund index drops 40% in 2008

LONDON, Feb 16 (Reuters) - Net returns of structured credit hedge funds fell around 40 percent in a disastrous 2008 as many went out of business, a leading sector index showed on Monday.

The Palomar Structured Credit Hedge Fund Index ended the year with 19 constituents, down from 30 at the end of 2007. Its net value fell to 559.55 at end-2008 from 924.63 at end-2007.

Structured credit assets such as asset-backed securities and collateralised debt obligations (CDOs) have been at the centre of the financial crisis, accounting for billions of dollars of writedowns at banks and hedge funds.

“Structured credit got terribly hit; liquidity was virtually non-existent,” said Markus Kroll, a partner in Palomar Financial Services Group, a Zurich-based financial advisory firm and fund of funds manager with more than 1 billion Swiss francs ($855.4 million) under management.

Among members of the index, however, there was a big divergence in returns between the funds that lost everything and a few others that reported gains of more than 15 percent or even 20 percent for the year, he said.

“There are a few funds that have done really well,” he said, adding that names of index constituents are confidential.

The index kicked off in early 2005 with a starting value of 1,000 and peaked at 1,133.94 at end-April 2007, before the credit crisis started to hit returns.

The number of constituents peaked at 40 funds in July 2007.

In late 2008, many hedge funds across asset classes suffered heavy redemptions as mounting losses led investors to withdraw and banks cut back leverage limits.

The structured credit fund index showed monthly declines of 6.16 percent in September, 4.25 percent in October, 5.99 percent in November and 0.74 percent in December.

Leverage was one of the key reasons for casualties in structured credit last year, but some of the funds that had gains for the year had leverage and managed it well, Kroll said.

The worst month was February 2008, with a drop of 17.15 percent in net returns mostly due to the collapse of what was then the largest index member, an asset-backed fund managed by the UK’s Peloton Partners LLP.

Palomar has recently been approached by a number of managers who are trying to create new structured credit funds, Kroll said. “At least that’s a sign that the market is not dead.”

A lot of distressed funds also have started to focus on structured credit, but they do not qualify for the index because they have strict limitations on redemptions and do not provide performance data, he said.

Palomar’s is an investable index, meaning that it includes only funds that are open to new subscriptions and allow investors to redeem within 180 days.