US hedge fund makes 1,000% return betting against subprime

A Californian hedge fund has made a return of more than 1,000 per cent this year by betting against US subprime home loans, making it one of the world's best-performing funds of all time.

Lahde Capital, set up in Santa Monica last year by Andrew Lahde, last week passed the 1,000 per cent mark, after fees, following the latest leg of the credit market turmoil.

The fall in the value of subprime-linked securities has boosted a group of funds that spotted the problems in advance. The decision to use derivatives to short, or bet against, low-quality US home loans taken by a select group last year appears to have become the most profitable single trade of all time, making more than $20bn (£9.7bn) this year.

John Paulson's New York-based Paulson & Co, the biggest of the group with $28bn under management, is said to have made a $12bn profit already.

However, Mr Lahde, whose fund is one of the smallest specialists shorting subprime, has now begun to return money to investors, telling them: "The risk/return characteristics are far less attractive than in the past."

In a letter, Mr Lahde said he expected the collapse in value of subprime mortgage-linked securities to be repeated for bonds backed by commercial property loans in a deep recession - which he also predicts.

"Our entire banking system is a complete disaster," he wrote. "In my opinion, nearly every major bank would be insolvent if they marked their assets to market." He said he would be putting some of his own profits into gold and other precious metals.

Mr Lahde has used the phenomenal returns to boost his business, launching a fund to bet against commercial real estate this autumn - which made 42 per cent in its first two months - and is in the process of creating a third fund to short credits with a broader mandate.

Lahde's first fund, US Residential Real Estate Hedge V Class A, soared 712.8 per cent in the year to the end of October, before this month's sell-off pushed it past the 1,000 per cent mark.

There is no reliable data on how many other funds have made 1,000 per cent, or 10 times the investment, in a year.

However, RAB Capital, a London hedge fund manager, shot to prominence in 2003 when it returned 1,475.5 per cent in its Special Situations fund, which now runs $2.4bn and is the biggest shareholder in Northern Rock, the troubled bank.

Low-risk trades, Page 24