By GREGORY ZUCKERMAN and CARRICK MOLLENKAMP
September 6, 2007; Page C1
SourceProblems in the credit markets are affecting even the savviest investors.
TPG-Axon Capital Management, an $11 billion hedge fund led by Dinakar Singh, who ran Goldman Sachs Group Inc.'s in-house trading unit, has scored gains of 22% so far this year, according to investors, thanks to a variety of bets anticipating problems in the subprime-mortgage market.
Yet those profits could have been greater had it not been for an investment of roughly $275 million in a structured-investment vehicle, or SIV, which has been hit by subprime-mortgage troubles. People close to the matter say TPG-Axon has written down to zero the value of this investment in Axon Financial Services Ltd., the company that created Axon Financial Funding Ltd., an SIV.
SIVs have grown in popularity in recent years. They are off-balance-sheet investment vehicles that generally raise cash by issuing short-term debt, notably commercial paper, and use the money to buy a variety of higher yielding assets.
Many SIVs are running into trouble because they own wobbly subprime-mortgage investments, and because it is becoming hard to raise money in the commercial-paper market.
Yesterday, credit-ratings firm Moody's Investors Service Inc., a unit of Moody's Corp., downgraded or said it might downgrade $14 billion worth of debt issued by such SIVs. Among the investments it placed on review for possible downgrade were capital notes issued by Axon Financial Funding.
Axon Financial acted as something of a hedge for Mr. Singh, who has been betting against mortgage companies, mortgage insurers and other financial companies, generating gains of about $2 billion so far this year.
If Axon Financial gets through this rough period, the hedge fund's stake in the company could rise in value. The investment was written down because the market value for the assets held by the SIV had dropped sharply, amid the turmoil of the credit markets. TPG-Axon chose to put a conservative valuation on the investment.
The write-down is the latest sign that hedge funds are being forced to re-examine their exposure to the short-term lending market.
TPG-Axon isn't the only hedge-fund firm to encounter problems in the SIV marketplace. Last month, Cheyne Finance PLC, an SIV affiliate of London hedge-fund group Cheyne Capital Management (UK) LLP, said it had begun selling assets to repay its debts. Yesterday, Moody's said it downgraded notes issued by Cheyne Finance. Bank-operated SIVs also may face increasing financial troubles amid a lack of investor interest in the IOUs that SIVs are issuing.
Some high-profile hedge funds have registered big losses amid recent market turmoil. That includes Boston Sowood Capital Management, a hard-hit fund run by former Harvard Management executives, and many "quant" funds, which make trades based on complex computer models.
The difference with TPG-Axon: The losses have been more than offset by Mr. Singh's other positions.
"They [Axon Financial Funding] are a very sound boat in what is turning out to be an incredibly severe storm," Mr. Singh said in an interview. "From a TPG-Axon perspective, our job is to structure our hedges and investments so that our investors stay dry under almost any scenario and we've done that" with its winning bets.
Axon, which was set up last year, still has credit lines from several banks and is relatively conservative in its investments. Its troubles underscore how quickly conditions have changed for a market that has long been seen as a model of stability.
Moody's said in a statement that Axon Financial Funding's notes faced a possible downgrade because of the "deterioration of the market value of Axon Financial Funding's portfolio and the potential impact of crystallized losses following asset sales."
Axon Financial Services Chief Executive Gregory Raab referred calls to a spokesman who issued a statement: "Axon Financial Funding continues to be one of the most conservatively structured SIVs, with among the highest quality portfolio of assets and the lowest leverage in the industry. While we are relatively well positioned, the asset backed commercial paper market environment continues to be extraordinarily challenging."
The action by Moody's came amid increasing pressure on SIVs. Many of these vehicles own assets, including securities tied to U.S. mortgages, whose value has dropped since early August.
The market flux is leading Moody's to monitor SIV ratings on a daily basis, the agency said. SIVs make up a small part of the commercial-paper market. The portfolios of the investment vehicles total about $350 billion.
Amid such jitters about European banks exposure to SIVs and similar vehicles, the Bank of England made extra cash available yesterday and the European Central Bank indicated it could inject more funds into euro-zone money markets today. The Moody's actions affected six SIVs. The agency downgraded the notes of one SIV and placed on review for possible downgrade the notes of five others. Several had signaled they faced financial pressures.
Treasurys Rise on Soft DataThe Treasury market took its cue from economic data yesterday, with soft reports lifting prices and sending the two-year and 10-year yields close to their lowest levels of the year. Gains took the two-year note below its key 4% yield, to 3.99% during the session, though it ended the session at a yield of 4.012%. Its price rose 8/32 point, or $2.50 per $1,000 face value, to 99 31/32 point. The benchmark 10-year note finished up 22/32 for a yield of 4.473%, below the key 4.5% mark.
--Deborah Lynn Blumberg