The long-running Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) fiasco is bringing a few hedge funds to their knees. Hedge funds who have battled with courts and congress over the last few years were served a severe blow recently as the federal court dismissed one of their lawsuits.
Claren Road faces redemptions
Apparently the most severely hit is Claren Road Asset Management, which is facing nearly $2 billion in redemptions, Bloomberg reports. Clients of Claren Road are pulling out $1.2 billion from the firm’s flagship Claren Road Credit Master Fund and $700 million from Claren Road Credit Opportunities. The firm has slipped as much as 10% in one if its funds in October. Holding a big stake in Fannie Mae and Freddie Mac preferred shares is, however, not the only reason for the massive decline in the funds’ returns. Claren Road has also suffered due to the slump in energy stocks, it holds positions in Cheniere Energy, Inc. (NYSEMKT:LNG) and Inc. (NYSEMKT:LNG) and Golar LNG Partners LP (NASDAQ:GMLP).
Paulson reverses gains yet again
John Paulson, who was boasting handsome returns across the hedge funds operated by Paulson & Co., has also suffered. Paulson’s event driven funds are hurting again. According to Bloomberg’s Kelly Bit, the Advantage Fund has fallen 14% in the month of October, making a loss of 25% for the year. Trades that went south included Paulson’s investment in AbbVie Inc (NYSE:ABBV) and Fannie Mae and Freddie Mac. Other funds also mirrored the losses; Paulson Credit Opportunities was down 6.8%, Paulson Recovery lost 7.4%, whereas the merger arbitrage fund, Paulson Partners, was down 4.8%.
Fannie Mae and Freddie Mac hurts Marathon, Owl Creek
Another fund nursing losses from Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) is Marathon Asset Management. The hedge fund suffered a loss of 3.2% in October according to a report from WSJ’s Juliet Chung. Marathon had slashed its position in the GSEs after share prices tumbled. The hedge fund said that it had readjusted for greater exposure to preferred shares compared to common equity.
Other hedge funds stung by Fannie Mae and Freddie Mac include, Owl Creek Asset Management and TIG Advisors. Owl Creek Overseas Fund has suffered a loss of 6.4% through October 24 according to HSBC Hedge Weekly. Although Owl Creek has a position in the GSEs, and their main fund fell 3.4% in the first three days of October, but it is not confirmed how much of this loss was attributable to Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). Owl Creek is down 10.3% YTD.
TIG Advisors has been known to hold preferred shares of Fannie Mae and Freddie Mac. The firm’s current involvement with the bailed-out entities is not confirmed. According to Hedge Weekly, TIG Arbitrage Enhanced Fund lost 4.6% in October, bringing its total return for the year down to just +0.34%.
Bill Ackman unscathed, Waterstone bags some profit
Perry Partners’ was down 1.6% in the last month in the Perry Partners International fund. Perry Capital had filed a complaint challenging the terms of the Fannie and Freddie bailout alongside Bruce Berkowitz’s Fairholme Capital. The only one riding the storm unscathed is Bill Ackman’s Pershing Square, which is boasting a return of over 40% as his other positions pay off handsomely.
Waterstone Market Neutral Fund, the only fund we know of with a short position in the GSEs has been through a very tough time. The fund saw a rare rise of 3.38% in last month through October 24. Waterstone stuck to its thesis that preferred and common equity of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) was worthless and such holdings will be written down to zero.