Highland Capital Shuts Down CDO Opportunity Fund
Another hedge fund bites the dust and wipes out investors. This time, massive losses on high-risk collateralized debt obligations (CDOs) have forced Highland Capital Management LP to close the Highland CDO Opportunity Fund. It is the third fund to shutter under the Dallas-based investment group since October 2008.
At one time, the Highland CDO Opportunity Fund ranked among the top 50 hedge funds, placing third in an October 2007 report by Barron’s magazine. The notoriety ended last year, however, when the fund - which previously achieved an average annual return of about 44% for three years straight - and the CDOs it invested in plunged in value.
As reported Feb. 20 by Bloomberg, Highland Capital is the largest shareholder in the Highland CDO Opportunity Fund. The firm also is considered one of the biggest players in the CDO world itself. That position, however, has suffered in recent months, as the value of CDOs continues to crumble dramatically.
In October, losses on high-risk loans and other types of toxic debt caused Highland Capital to close two other hedge funds: the Crusader Fund and the Credit Strategies Fund. Together, the funds had assets totaling more than $1.5 billion.
Now, Highland Capital is facing more problems. On Jan. 23, the Mary E. Bivins Foundation sued Highland on charges that the company reneged on a $1.8 million redemption request filed before the closing of the Highland Credit Strategies Fund. According to the lawsuit, the Amarillo-based not-for-profit invested $1.75 million in the Highland Credit Strategies Fund in 2006. Two years later, when the foundation wanted out of the fund, Highland accepted its request but reportedly delayed the foundation’s payout (valued at $1.9 million). In October, Highland announced plans to wind down the fund entirely.
To date, only $80,000 has been paid to Bivins.
Hedge funds in general are in meltdown mode lately. The financial crisis, de-leveraging, client withdrawals and illiquid assets all have contributed to the average hedge fund losing 18.3% in 2008. About 700 hedge funds closed during the first nine months of 2008, according to Hedge Fund Research. For the entire year, 920 funds may have been shuttered - a figure that eclipses the previous record high of 848 closures in 2005.
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