Fore Research Fund Fell in July as Preferred Stocks Collapsed

Date: Wednesday, July 30, 2008
Author: Saijel Kishan, Bloomberg

Fore Research & Management LP, a New York hedge-fund firm that oversees about $2.5 billion, lost as much as 12.4 percent in its convertible-bond fund this month as preferred shares of financial companies plummeted, according to two people with knowledge of the matter.

The decline left the fund with a loss of about 8 percent this year through July 22, according to the people, who asked not to be named because the information is private. Preferred stocks fell 21 percent in the first half of the month, according to an index of perpetual issues compiled by Merrill Lynch & Co.

``Any funds holding the preferred shares of financials would have got hurt pretty badly given the market moves this month,'' said Karim Leguel, managing director in New York for London-based Rasini & C. Ltd., which advises clients on investing in hedge funds.

Convertible-bond hedge funds have been the worst performing group in 2008, dropping an average of 7.6 percent through June, according to data compiled by Chicago-based Hedge Fund Research Inc. Lydian Overseas Partners Fund, run by Westport, Connecticut-based Lydian Asset Management LP, declined 10 percent through July 17, according to investors. London-based Ferox Capital Management Ltd.'s main fund lost 12 percent through July 18.

Executives at Fore, Lydian and Ferox declined to comment.

Convertible-bond funds try to profit from price discrepancies between a company's common stock and convertible bonds. A convertible bond gives the holder the option to exchange it for the issuing company's stock at a preset price.

The funds may also invest in preferred stock, and sometimes hedge their holdings by selling short the issuing company's common shares, a bet the price will fall.

Preferred Stock Meltdown

Preferred securities plunged in mid-July on concern that Fannie Mae and Freddie Mac preferred stockholders would be wiped out as part of a government-orchestrated rescue. Preferreds of financial-services firms including Citigroup Inc. also tumbled.

Convertible funds may have also been caught in a squeeze when the S&P Financials Index soared 29 percent from July 16 through July 23 as banks reported better-than-expected profits and oil prices fell.

Fore was founded by Matthew Li, who oversaw convertible- arbitrage trading at TD Securities, a unit of Canada's Toronto- Dominion Bank, before spinning out the group to start Fore in 2003. The fund returned about 8 percent last year and 21 percent in 2006, and has posted an average annualized return of about 11 percent since inception, according to investors.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net