Crikey

‘Tis bemusing to read of Basis Capital looking for someone to sue over its considerable problems. An appraisal of Basis by van Eyk Research indicates the difficulties started very much at home and were evident last year.

Van Eyk downgraded Basis Capital and Absolute Capital in May 2006 and proceeded to sell down the investment it had in Basis in its Blueprint alternative investments fund.

Van Eyk senior analyst and fixed interest specialist, Nigel Douglas, says withdrawal limits meant Blueprint was still caught with a small holding when Basis suspended withdrawals last month.

In a Eureka Report interview, Douglas said Basis and Absolute were downgraded for different reasons:

Douglas: These two funds failed the grade. Basis had become riskier in the sort of CDOs in which it was investing. Its level of disclosure was below standard. We need very high levels of disclosure for these types of investments. And key-person risk had actually increased in the fund and there’d been people turnover.

Q: So the Basis Capital in trouble is not the Basis that you originally rated and invested in?

Douglas: They changed their investment strategy to become more aggressive, investing in low-grade tranches, equity tranches. Those are the higher return/higher volatile tranches, so we took that into account in coming out with the rating.

Q: But where does Absolute Capital fit in?

Douglas: Absolute Capital is a more conservative investment. They’re not leveraged like Basis. They invest in less risky tranches and different types of CDOs in structured credit, but we’ve had concerns about the organisation for different reasons and that fund has always been B rated. We have been concerned about the liquidity in that fund.

Well they were certainly right to be concerned about liquidity. As for Basis, the disclosure that its Basis Yield master fund is facing losses that “may exceed 80%” probably says enough about its future.

But alternative investment funds don’t need a credit crunch to get into trouble. Lost among the bigger stories yesterday is the effective demise of Richard Kovacs’ Goldlink listed hedge funds.

Goldlink had done nicely out of borrowing the metal and playing the gold options market to its own little formula, but it fell foul of Pascoe’s Law of Inertia: Things and systems that work well tend to continue to work well – until they don’t.

The gold market volatility patterns changed and both Goldlink Incomeplus and Goldlink Growthplus were smashed. Yesterday’s announcement to the ASX pulled the entire plug on the game – the positions are being unwound, investors will be left with several cents in their original investment dollar and the board is trying to think of something to do with that.

DISCLOSURE: The Pascoe family super fund unfortunately has a small exposure to Goldlink in the high-risk section of its portfolio. Make that, the “failed” section.