Bear Stearns debacle forces hedge fund index to restate

NEW YORK — The recent fallout in the market for subprime mortgages caused one prominent hedge fund index to revise some of its performance returns last week.
Last Monday, the Credit Suisse/Tremont Hedge Fund Index reported that its index for fixed-income arbitrage gained 0.21% in June and 3.7% year-to-date.
On Wednesday, the index revised those returns, telling investors that its index for fixed-income arbitrage fell 6% in June and 7.5% for the year.
The index, which also saw smaller changes, needed to be revised because Bear Stearns Cos. Inc. didn’t report returns on time, an official with Credit Suisse Asset Management LLC of New York said.
In June, Bear Stearns said that it was bailing out one of its two struggling hedge funds that invested in bonds linked to subprime mortgages.
The index change spurred one financial adviser who specializes in alternative investments to question the opaque nature of the hedge fund industry.

“I just think it points out a risk to hedge funds we only remember when something like this happens,” said Robert A. Isbitts, president and chief investment officer of Emerald Asset Advisors LLC of Weston, Fla. “And the risk is the time lag in reporting.”
The lack of transparency and liquidity in such cases is a clear reminder of the hazards in hedge funds, said Mr. Isbitts, whose firm offers the Emerald Hybrid Index of mutual funds that use hedge-fundlike strategies.
“This doesn’t mean that hedge funds are bad, but we tend to forget this is one of the risks,” he said.
Last month, Bear Stearns of New York said that it would provide up to $3.2 billion in financing for its High-Grade Structured Credit Strategies Fund. The company wants the fund to sell its assets in an orderly fashion.
It was the biggest bailout since the rescue of Greenwich, Conn.-based Long-Term Capital Management LP in 1998. The Bear Stearns’ funds’ main investments of the bailed-out fund and the Bear Stearns High Grade Structured Credit Enhanced Leveraged Fund were collateralized debt obligations, according to published reports.
“It’s a special situation,” said Phillip Schenk, director of marketing with Credit Suisse. Bear Stearns didn’t make the information about its bailed-out fund available until Tuesday night, he said.
About the change in the category for fixed-income arbitrage, Mr. Schenk said, “I don’t recall anything of that magnitude, at least recently.”
Investors should be aware of the variations in such hedge fund indexes, another industry observer said.
“Depending on what index you use, you should know how it’s calculated,” said John Van, chief financial officer of Greenwich (Conn.) Alternative Investments LLC, which operates an index and allocates client assets to hedge funds.
For example, he asked, is the index equally weighted or weighted by capitalization? “You have to know what you’re looking at,” Mr. Van said.