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CAPITAL MARKETS

US sub-prime: Hedge funds make light of sub-prime woes

Press reports that hedge funds will be the hardest hit by the sub-prime mortgages free fall in the US have been proved wrong by Paulson and Co. According to sources, the $7 billion merger arbitrage and event-driven hedge fund has produced 100% net returns year to date, and 60% in February alone on the back of sub-prime bets.

One investor says founder John Paulson voiced his negative views in November and has been heavily shorting the ABX sub-prime index. The index measures the cost of insuring against defaults on sub-prime bonds.

Paulson is not alone in generating profit from the sub-prime market collapse. One investor says he knows of a hedge fund that put on a $2 billion trade in February, making $300 million in that month alone.

Andy Chow is a portfolio manager at SCM Advisors, a money manager located in San Francisco. He says hedge fund managers have rapidly come up to speed in understanding the sub-prime mortgage market and have been successful in finding opportunities. "Macro hedge funds tended to be the first to enter the market about 18 to 24 months ago, as they wanted to express a view on declining home prices in the US, and the small market cap of home builders was preventing them from taking big bets in the equity markets," he says. Credit hedge funds were hot on their heels, and now many managers are playing in the space using complex multi-legged strategies, Chow adds. "They have rapidly come up to speed in understanding the collateral, the structures and the corresponding derivative products.

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