Bloomberg News

Lippmann’s LibreMax Gains in Market Rout Roiling Subprime

September 12, 2011

(Updates with high-yield swap index in last paragraph.)

Sept. 12 (Bloomberg) -- LibreMax Capital LLC, co-founded by former Deutsche Bank AG trader Greg Lippmann, gained 1.2 percent last month using bets against subprime mortgages, high-yield corporate bonds and equities to offset losses on housing debt.

The results brought returns in Lippmann’s $653 million fund to 5.1 percent this year and 9.5 percent since inception in October, LibreMax said in a letter to investors. Lippmann, whose New York-based firm oversees almost $900 million in assets, declined to comment through a spokesman.

Subprime-mortgage bonds lost almost 3 percent on average in August, the worst results in more than two years, as credit markets were roiled by the slowing U.S. economy and Europe’s debt crisis, according to Barclays Capital index data. The hedge-fund industry has gained 2.8 percent in 2011 after falling 1.2 percent last month, according a Bloomberg aggregate index.

“For the last several months we have oriented ourselves more defensively, which positioned us well for August’s volatility,” Libremax said. The firm also “adeptly traded” its derivative hedges in August, “actively rebalancing positions throughout the month,” according to the letter.

Lippmann, LibreMax’s chief investment officer, helped Deutsche Bank to offset losses on mortgage-related investments during the financial crisis of 2007 and 2008 with wagers against subprime debt that made $1.5 billion, according to an April report by a Senate panel. He also brokered trades against housing for at least 50 hedge funds including John Paulson’s, he told the Financial Crisis Inquiry Commission.

Paulson Losses

Paulson, who is betting on an economic recovery after making billions of dollars wagering against subprime bonds, has lost 34 percent this year in his largest hedge fund, according to two people familiar with the firm. His Advantage Plus Fund lost 15 percent last month, said the people, who asked not to be identified because the fund is private.

Subprime-mortgage bonds, which gained 19.8 percent from January 2010 through February, have lost 6.9 percent since then, including a decline this month of 1.7 percent through last week, Barclays Capital data show.

Lippmann started LibreMax with Fred Brettschneider, the former head of global markets in the Americas at Deutsche Bank, after they departed the German lender last year.

Subprime mortgage bonds represented 44.3 percent of the firm’s holdings last month, with other types of home-loan securities without government-backing accounting for an additional 28.4 percent, according to the letter.

Subprime Investments

The firm has said its subprime investments have been concentrated among bonds issued before 2005, which are less volatile because of better underwriting and home price gains after they were issued. ABX index contracts, which Lippmann in 2005 helped to create to facilitate wagers against housing, are among the hedges it’s been using, according to the letter.

Securitized debt had “mild outperformance” versus other markets in August “amidst an extremely volatile month” that hampered liquidity, LibreMax said.

The Markit Group Ltd. CDX North America High Yield Index, a credit-default swaps index which falls as investor confidence in speculative-grade company debt deteriorates, dropped 5.5 percentage points to 95 percent of face value last month. The benchmark decreased today by 0.9 percentage point to 90.4 as of 2:52 p.m. in New York, the lowest level since September 2009.

--With assistance from Kelly Bit in New York. Editors: Pierre Paulden, Alan Goldstein

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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