Highland Capital CDO Fund Is Insolvent, Wiping Out Investors

[Joanne98]

By Miles Weiss

Feb. 20 (Bloomberg) -- Highland Capital Management LP, the investment firm founded by James Dondero and Mark Okada, said one of its hedge funds was wiped out by losses on high-risk debt securities, at least its third fund since October to close.

The managers and directors of Highland CDO Opportunity Fund LP, comprised of a U.S. partnership and an offshore affiliate, determined that “it is in the best interests” of the fund to wind down, according to a Feb. 4 letter to investors. Remaining assets will be distributed to creditors, leaving nothing for shareholders.

Highland Capital, based in Dallas, said in October it would shutter its flagship Crusader Fund, which had declined about 30 percent during the year, and its Credit Strategies fund. That month, Barclays Capital Inc. seized $642 million of leveraged loans from the firm, which oversees $33 billion.

As recently as October 2007, Barron’s magazine ranked Highland CDO Opportunity third among the top 50 hedge funds, with an average annual return of 44.12 percent during the three-year period ended that June. Its fortunes reversed last year, as the securities it invests in, known as collateralized debt obligations, plunged in value amid the credit crunch and downgrades by ratings firms.

The fund became insolvent after assets values were eroded by “the unprecedented market volatility and disruption to the financial system, and the market for structured products assets in particular,” Highland Capital said in the letter, a copy of which was provided by an investor to Bloomberg News. Assets were valued at $361.6 million, according to a June 2008 regulatory filing.

CDO Meltdown

Highland Capital, founded in 1993, was the fund’s largest shareholder, said a spokeswoman. The firm hadn’t marketed the fund extensively to investors, she said.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a1MrBhVi9fmA&refer=home

[Warpy]

1. Roubini expects a third of hedge funds to go under

I think he's overly optimistic.

[Joanne98]

2. I think so too. Probably more like 60%