By James Mackintosh

A troubled hedge fund run by Australia’s Basis Capital is insolvent and has appointed liquidators to wind it up in the Cayman Islands, according to court filings.

The Basis Yield Alpha Fund – until recently one of Australia’s best-rated hedge funds – collapsed after investments linked to US subprime mortgages went sour and Wall Street banks seized assets to cover debts.

The filing for the Yield Alpha fund follows the bankruptcy in the Caymans of two Bear Stearns hedge funds hit by similar investment problems.

All three funds have applied to US courts for protection from lawsuits as they liquidate in the Caymans, which has a faster procedure.

Basis said in a court filing in the US on Wednesday that it “disputed many of the default notices issued or purportedly issued” by its lenders.

It told investors a fortnight ago that it was considering legal action against some of its banks, although it has not said against which.

Among lenders which issued default notices were JPMorgan, Goldman Sachs, Citigroup, Morgan Stanley, Lehman Brothers and Merrill Lynch, Basis said.

Before the collapse of Yield Alpha, which was sold via feeder funds globally and to Australian private investors, Basis had almost US$1bn under management.

Based in Sydney since 1999 and run by Steve Howell and Stuart Fowler, Basis had secured a solid reputation, helped by top ratings from fund assessment agencies, including Standard & Poor’s.

However, its steady month-on-month gains had come through a strategy of investing in bonds issued by structured credit vehicles such as collateralised debt obligations.

The value of these were hammered after soaring defaults on US subprime mortgages, which backed many of the CDO investments.

“The devaluation of these secured assets led to margin calls from trade counterparties, which Basis Yield was ultimately unable to meet,” Basis said in its court filing.

It told investors in letters over the summer that the fund’s assets had fallen by 50 per cent, before revising that up to 80 per cent, while blocking redemptions.

Three Grant Thornton partners, from the Caymans, the UK and Australia, were appointed as joint liquidators in a court hearing in the Caymans on Tuesday.

Grant Thornton was brought in by Basis over the summer, along with Blackstone, the private equity group, to advise on restructuring and negotiate with banks.

Neither Basis nor Grant Thornton returned calls seeking comment.

Copyright Fund China 2009.

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