An order to temporarily suspend redemptions in United Capital Asset Management's group of Horizon hedge funds and the closure of a separate hedge fund managed by Denver-based Braddock Financial, might have been reason enough to shock and subdue the ABS market last week, especially because they were the latest in a series of disturbing episodes caused by instability in the mortgage-backed securities market.
The market sources who stayed behind to conduct the trickle of ABS business last week, however, say that the Independence Day holiday - following the close of June and the second quarter - stifled the marketing and pricing of ABS deals.
UCAM's four funds, Horizon Fund, Horizon ABS Fund L.P., Horizon ABS Fund Ltd. and Horizon ABS Master Fund Ltd., faced withdrawal requests from several investors, including one whose holdings accounted for about 25% of managed assets, according to the firm. Company officials said that after it sold a large amount of securities, it had more than $145 million of cash on hand against its lending requirements. With that, it would continue to operate, while working on a plan to honor the redemption requests, and keeping an eye trained on current market risks, according to a company statement.
Around the same time, Braddock notified investors that it would close its Galena Street Fund, whose subprime MBS holdings amounted to about $300 million, according to press reports.
Amid the instability surrounding the Horizon and Galena hedge funds, securitization market sources say the industry completed just one deal for the week, a new RAAC series. The $279 million RAAC 2007-SP2, which is managed by RBS Greenwich Capital, and which was in the pipeline in June's final few work days, priced last Tuesday.
The triple-A-rated, one-year piece priced on the wider end of guidance, at 20 basis points over sequential floaters. Meanwhile, the three-year, triple-A-rated securities came in at four basis points over the same benchmark, a sign that investors thought pricing for that group of securities was more reasonable.
"The holiday completely crushed the week," in terms of volume of new issuances and the performance of the ABX Index, said one trader. Emphasizing that the many absences affected the market more than anything else, he would not say whether the absences and lighter trading actually spared the index from more extensive losses.
Those hedge fund events, however, gave the market a lot to consider before springing back into action on Thursday. Much of the asset securitization market was waiting to see how recent hedge fund volatility, on the tail of instability in the CDO sector, would play out in price discoveries before taking action, said one investor.
"It's just the practical way to do things. There was a lot of volatility going into month's end," the investor said. "There is a lot of price discovery still to be done."
Investors who are trying to reshuffle their holdings of certain structured finance paper are finding that they have to negotiate hard with dealers on prices. In some cases, dealers pitch reductions in par on all sorts of paper - even on wrapped, triple-A rated securities.
"You can pull back and have an argument," one investor said. "People are trying to be very conservative with their marks."
A conservative approach might not be quite enough, some said. The general thinking in the structured finance market right now is that shorting works best. The market repriced so drastically last month that any portfolio managed under a long strategy is expected to yield tough-looking results for June, and the only investors that are coming out ahead are the ones that shorted the index, said one market observer.
Still, the short-term outlook is ominous for some of those alternative asset managers, said the same market observer, who predicted that at least two more hedge funds with structured finance positions would destabilize in the coming weeks.
"The allocation of money to structured finance is really in jeopardy right now," one market observer said. "It could impact the size of the market going
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