Thursday, August 02, 2007

Is That a Hedge Fund? Ouch!

Anything that might be a hedge fund, mortgage fund, or have leverage is getting sold. In some cases this is somewhat rational. Case in point: Newcastle. This is a mortgage fund run by a hedge fund company. They do have sub-prime loans and lots of leverage. But subprime loans are a minority of what they have and they have sold off a lot of what they bought in CDOs (but retained some of the worst bits). The majority of their mortgages though are commercial mortgages. Cramer listed NCT in his "dirty dozen" and a Citigroup analyst downgraded the stock yesterday. It's dividend yield has gone up to 16%. Today, the company will report its second quarter earnings. Hopefully, they will give some forward guidance.

Less rational is the selling of the Everest Brown and Babcock fund of hedge funds listed in Australia. This stock is a closed end mutual fund invested in around 20 hedge funds via a total return swap that includes leverage that is equivalent to taking on a one to one margin loan for each dollar invested. The last reported net tangible assets was $A4.07 a share and last night the stock closed at $A3.05. The company has announced that the funds they invest in have no exposure to the subprime market. The yield is 22%.

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