While many of the world's leading financial institutions struggle with a hangover from the credit market party that came crashing to a halt this summer, Andrew Lahde has some bad news for them: the credit crunch is going to get worse and it’s going to spread.
Lahde Capital’s flagship fund, US Residential Real Estate Hedge V, is up 1000% year-to-date. Another fund he manages, concentrated on commercial real estate, is up 80%. In a recent letter to investors he’s tells investors that he is taking the firm out of its short positions in BBB- and BBB rated paper over the next ninety days . He’s offering investors the opportunity to make early redemptions, telling them that it is time to take money off the table.
But this hardly means he’s suddenly become optimistic about mortgage backed paper. In a letter to investors obtained by the boys and girls at FinAlternatives, Ladhe tells investors that he expects further deterioration in the ABX index for paper rated AA through BBB-.
“We believe that all of these positions have further downside,” Ladhe writes. The AA rated paper will “melt away into the history books,” he says, adding that he expects this paper will eventually be worth “zero.”
If anything, he has become more pessimistic at time has passed. “The credit that America has been having an orgy with is going away,” Ladhe writes. “Our banks are saddled with endless bad debt and our collective leadership is clueless.”
Of course, being right once doesn’t mean that Lahde will always be right. It will certainly be hard to replicate his 1000% performance. But it’s a good reminder after a day like yesterday, when—consumer sentiment be damned—everything comes up roses, that there’s still a lot of weeds in the garden of good and bad credit.
Oh, and in case you are wondering, Lahde is launching a new fund. It's strategy? We'll let him tell it: "The focus will simply be shorting credit. There is plenty of bad credit left out there to short."
Hedge Fund Gains 1,000%, Preps Short Credit Fund [FinAlternatives]
Yesterday a controversy broke out about whether or not Citigroup chief financial officer Gary Crittenden should back up his contention that the perceived risk of owning certain mortgage bonds, as measured by the ABX, was overstating the actual risk. Crittenden’s critics say that if Citi really believes what it is telling worried investors—that things aren’t as bad as they look—then Citi should start employing strategies to capitalize on this. His defenders reply that Citi already is doing something—holding the bonds instead of selling them at steep discounts—and, more importantly, that there is no way to short the ABX. 