These equity vehicles are very unusual in structured credit in that they tap into the retail investor base (see Asset-backed securities: Funds list to ease first-loss sales, Euromoney, May 2006). Everquest is one of the largest of this new breed of funds and is co-managed by Bear Stearns Asset Management (BSAM) and hedge fund Stone Tower Capital.
The two Bear Stearns High Grade (BSHG) hedge funds that have attracted so much negative attention are managed by Bear Stearns veteran Ralph Cioffi – who also happens to be co-chief executive of Everquest together with Michael Levitt of Stone Tower. The listing particulars reveal that the BSHG funds own 67% of Everquest, and have transferred equity in 10 CDOs to the permanent capital vehicle for a consideration of $548.8 million. Later in the document it is revealed that all of Everquest’s CDO holdings were contributed by BSAM and that the consideration paid "was not negotiated at arm’s length and may exceed the values that can be achieved upon the sale of such assets". What the BSAM funds were doing was buying the senior tranches of CDOs and leveraging them on repo. Given the fact that one of the funds has been widely reported to have tanked 23% in the first quarter of this year, holding the first-loss pieces of these same CDOs would not be a comfortable place to be.