By Peter Smith in Sydney

Absolute Capital, an Australian hedge fund group that invests in collateralised debt obligations, has temporarily suspended redemptions for two of its funds, becoming the latest casualty of the crisis engulfing the US subprime mortgage market.

Absolute’s Yield Strategies Funds and Capital Yield Strategies Fund NZD, which together have A$200m invested, have suspended investor withdrawals until October 25 due to “the current lack of liquidity in global structured credit markets”.

The suspension comes days after Basis Capital, another Australian hedge fund group that is more seriously exposed to the subprime market, appointed Blackstone as financial adviser to two of its struggling funds.

Less than a handful of Australian hedge funds are thought to have a material exposure to the US subprime market, according to two investment consultants, although they may hold indirect investments via commitments to funds of hedge funds.

Absolute said it estimated July losses from its two funds at up to 6 per cent.

“The general lack of liquidity in the market, and in particular the CDO debt market backed by senior secured loans where we invest, led to the decision to temporarily close the funds to ensure equity for, and to protect, investors,” Absolute said.

Absolute added that the funds’ exposure to US subprime loans had been less than 5 per cent of their portfolio and employed “little leverage”.

Absolute said the temporary closure was the best defensive measure to protect the longer term interests of its investors and “to ensure equity amongst all investors as we manage any withdrawal requests”.

“Liquidity in the global structured credit market is currently very limited,” Absolute said in a statement. “We have taken this proactive step as other managers, who have larger exposures, are unwinding positions in the market at this time and we believe it would negatively impact the funds’ investors to become a seller in this market.”

It added that there had been few withdrawal requests but said the funds were not adequately placed to “satisfy or price withdrawal requests.”

Withdrawal requests will not now be processed until October 25.

“Towards the end of this time window, liquidity in the market may improve and then the funds will be better placed to satisfy withdrawal requests.”

Copyright Fund China 2008.

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