Passport Capital LLC, a hedge fund run by John Burbank, is set to close its materials fund after accruing 31% losses this year.
The San Franciscan hedge fund manages assets worth around $3.4 billion, but its materials fund has been struggling over the last couple of years, although it is still up 6.6% since it was opened in March 2006.
The portfolio managers, James Cunningham and Sebastien Boifort, explained that the losses were on account of unexpectedly illiquid investments in privates, which make up nearly two thirds of the portfolio as a whole.
Over the next few days, it is expected that Passport will return three quarters of the public portion of the fund to investors, with the scaling down continuing on into the next few months, a letter obtained from Bloomberg reported.
Burbank has been a vocal participant in the recent economic issues faced by the eurozone and beyond, and has gone on record to say that he expects a global recession. However, it has recently been reported that he intends to invest in mortgage securities following strong US housing market data.
In a bid to hedge these investments, Passport will also purchase non-agency mortgages in the event that property prices do indeed spike. In this move, Passport will be joined by Brevan Howard Asset Management LLP, D.E. Shaw & Co., Cerberus Capital Management LP and Canyon Partners LLC, Bloomberg Businessweek reported.
Given that these mortgage backed securities lack government guarantees, the risk is far greater for the firm. However, Jeff Kong, who is heading this particular strategic move, has declared that he feels the extra returns expected to be worth the risk.
The US housing market is an area which has reaped rich dividends for Passport; in 2007, Burbank made the firm huge gains from a bet that subprime home loans would fall. The move earned his fund 220% that year.