5 July 2007

What a difference two months makes or who's the idiot now

The investors: How to get rich trading "idiot" loans
Investors have made a fortune trading bonds backed by mortgages.
By Stephen Gandel, Money Magazine senior writer
May 2 2007: 1:21 PM EDT

(Money Magazine) -- The housing boom was good to John Devaney. Really good. He owns a Rolls-Royce, a Gulfstream Jet, a 12,000-square-foot mansion in Key Biscayne and a 143-foot yacht, as well as a few Renoirs and a valuable 1823 reproduction of the Declaration of Independence. Devaney's not a developer, and he's certainly not a flipper. The 36-year-old CEO of United Capital Markets is a bond trader. And one of his specialties is buying and selling bonds that are backed by the mortgage payments of ordinary homeowners.

Option ARMs? Devaney loves 'em. "The consumer has to be an idiot to take on those loans," he says. "But it has been one of our best-performing investments." Devaney's not out to get people into bad loans - or into good ones. He just makes bets on how many people will repay and when...Devaney, who told a crowd of investors that the riskiest mortgage bonds looked "awful" before the crash, says he thinks he'll be buying. "I don't believe the carnage and fallout will be as bad as people think," he says.


Hedge funds call 'time out'
The top trader at United Capital Asset Management took the extraordinary step of suspending redemptions on four hedge funds.

Wed, Jul. 04, 2007

Flashy Key Biscayne trader John Devaney has temporarily stopped allowing customers to withdraw money from his four Horizon hedge funds, which invest in subprime mortgage securities, in a bid to avoid a fire sale at depressed prices.

His firm, United Capital Asset Management, which has assets of about $570 million, took the extraordinary step of suspending redemptions after many Horizon investors in recent days ran for the exits as volatility in the structured debt market spiraled.

The funds are Horizon Fund L.P., Horizon ABS Fund L.P., Horizon ABS Fund Ltd., and Horizon ABS Master Fund Ltd., which have assets of roughly $510 million and are run by Devaney.
The trader started his brokerage firm, United Capital Markets, in the Florida room of his Key Biscayne home in 1999 and it grew rapidly, adding the asset management arm in 2005.
The firm's move likely signals widening woes for hedge funds, which are largely unregulated entities that invest money for wealthy clients.

Among those seeking to cash out of the Horizon funds is an investor holding almost a quarter of the total assets managed, said United Capital, which invests in bonds backed by consumer and commercial obligations such as home equity and car loans and aircraft and equipment leases.
''Over the past 10 days we have received an unusually high number of redemption requests, including a request from our largest investor that accounts for nearly one-quarter of our assets under management,'' the Key Biscayne firm said in a statement.

Horizon disclosed that it incurred losses -- both from securities trading and from the plunge in prices -- which resulted in a loss for June and year to date, but it didn't say how much.
A spokesman for United Capital said the temporary halt on fund withdrawals is aimed at protecting investors from losses. ''We didn't want to be in a situation of being forced sellers in a market that's very unfavorable,'' the spokesman said. ''We thought if we dumped, that would be a disservice to everyone in the portfolio.''

United Capital's move comes as the market for the sophisticated structured debt it wheels and deals is being buffeted by a rising wave of uncertainty and investor jitters. Among other things, Wall Street firm Bear Stearns has been mired in the recent meltdown of two of its hedge funds whose bets on risky subprime mortgages went bad, prompting a costly bailout. The subprime mortgage market is suffering from rising delinquencies and foreclosures as housing sales have weakened and interest rates have climbed. Such mortgages are typically packaged into securities and sliced and diced into a variety of sophisticated investments, which have plunged in price recently, triggering wider fallout in the markets.

Devaney, 37, the son of a local attorney and a special-education tutor, has established himself as a brash and energetic trader who has drawn national recognition and is comfortable with a high level of risk... Devaney boasts a Gulfstream jet, a collection of yachts, and a Rolls Royce. As of last year, he had 27 properties ranging from Vero Beach to the Bahamas. Last year, he and his wife bought a $16.25 million home in Aspen, Colo., and he has assembled an art and antique collection that includes Renoirs, Picassos and Chagalls. He also has one of the few original copies of the Constitution.

In a statement, United Capital and Horizon emphasized they aren't liquidating and intend to continue operations. The firm said as a defensive move it reduced its risk exposure during June by selling off investments and paring back on its bets... "We have spoken to our lenders and they are supporting our efforts,'' United Capital said. ''We will stay committed to our investors and counterparties into the future and look forward to processing these redemptions.''


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