UK hedge fund manager Solent falls foul of credit market turmoil

Solent Capital, a UK hedge fund and specialist credit investor, has said it might have to sell some assets in one of its funds because its banks refused to loan it any more money.

The fund, which manages $8.8bn (£4.4bn) comprised mainly of asset-backed securities, is the first London hedge fund to publicly admit getting caught up in the meltdown of the sub-prime mortgage sector in the US. The fund in question, MainSail II, includes loans granted to Americans with poor credit histories. It may be forced to sell assets after having to take out emergency bank loans because commercial lenders refused to provide it with the short-term cash that it needs to make investments.

The announcement from the London-based firm is the latest revelation in what analysts predict will be a dripfeed of bad news from banks, hedge funds, mortgage lenders and companies in related sectors, as their exposure to the credit crunch becomes clear.

It emerged yesterday that Deutsche Bank has abandoned certain credit investment strategies after absorbing a €100m (£67.8bn) loss last month. The bank, which last week borrowed funds directly from the US Federal Reserve after the central bank slashed its lending rates for banks, also reassigned a 15-person group that had been dedicated to investing in sub-investment grade bonds.

Solent was started in 2003 by three partners: Jonathan Laredo, the former head of JPMorgan's European and Asian structured business, Tim Gledhill, co-manager of European structured credit trading at Merrill Lynch, and Geoff Smailes, a quantitative trader at Credit Suisse. It started out by trading credit derivatives but soon became one of the most aggressive players in the industry, devising and managing complex credit instruments such as CDOs.

CDOs are instruments made up of millions of individual loans that are pooled together and then sold in slices to investors. As Americans began defaulting en masse on their loans this year, the value of these instruments collapsed, leading banks to spurn firms that invest in the sector. Solent manages about $8.8bn of assets, including 15 CDOs, three structured credit investment programmes and one credit fund.

In its statement, the company said: "As a result of such adverse liquidity and market conditions, a market value coverage test wind down event has occurred. For so long as such wind down event is continuing, the company must comply with specified wind down management procedures. This may result in the forced sale of investments which may materially impact principal and interest repayments on notes issued by the company."

The news comes as the markets continued their recovery after falling precipitously last week. In London, the FTSE 100 registered a 14.5 point gain to end the day at 6,078.7.