Too early to get too many details as of yet, but Peleton, the well known London multi strat firm, is closing down its asset backed securities fund (up some 87% in 2007, and winner of the Eurohedge "best new fixed income fund of the year".) According to Bloomberg, the firm "is liquidating its ABS Fund after ``severe'' losses on mortgage-backed debt and demands from banks to repay loans."
Aside from the predictable news that Citadel hopes to buy the assets (operational alpha, anyone), we were interested to see that the problems in the ABS fund have also led the firm to freeze the main multi strategy product. Per Bloomberg:
"Peloton froze redemptions from its $1.6 billion Multi- Strategy Fund, which has a ``very large position'' in the ABS Fund, according to a separate investor letter. The investment was about $500 million, according to one investor.
``The problems for the Peloton ABS Fund have had a serious negative impact on the Multi-Strategy Fund and we are currently assessing our options,'' the letter said."
One trend we have seen amongst multi strategy complexes is for firms to develop highly complex structures with multiple trading entities underneath the main master fund. What it is not easy to discover, however, is the extent to which this web of subsidiaries invest in each other and provide cross support and cross guarantees in the event of margin calls or defaults. Clearly, the risk is that problems in one strategy and subsidiary create rapid contagion across the entire complex - this begs the question of whether multi strategy funds are vulnerable to the failure of their weakest link?
It will be very interesting to see this situation unfold over coming days.