Volatility in global credit markets has hit another Australian high-yield fund, Macquarie Bank Ltd.'s Fortress Investments Ltd., which said that investors in the funds face losses of up to 25%.
Fortress is the third fund manager in Australia to flag serious problems and is the latest sign that the fallout from U.S. subprime mortgage sector woes is spreading ever wider. Australia has the largest hedge-fund industry in Asia, according to the Australian government, and Australian hedge funds have been some of the first to say that the global widening in yield spreads has cut deep into their value.
Investors in Fortress had put in 220 million Australian dollars (US$188 million), which was then leveraged to create a fund of between A$1.2 billion and A$1.3 billion, according to Fortress. The funds weren't directly exposed to U.S. subprime mortgages, but problems in that sector have pushed down the value of riskier investments in credit markets generally.
Look at those leverage amounts -- 5 and 6 to 1. Those are levels where you are asking for trouble.