Highland Shuts Funds Amid 'Unprecedented' Disruption - Bloomberg

Oct. 16 (Bloomberg) -- Highland Capital Management LP will close its flagship Highland Crusader Fund and another hedge fund after losses on high-yield, high-risk loans and other types of debt, according to a person with knowledge of the decision. Highland, whose total assets under management has shrunk to about $33 billion from $40 billion in March, will wind down the Crusader fund and the Highland Credit Strategies Fund over the next three years, said the person, who declined to be named because the decision isn't public. The hedge funds had combined assets of more than $1.5 billion. The Highland Credit Strategies fund suffered from ``unprecedented market volatility and disruption'' in financial markets, according to a letter to investors that was obtained by Highland, founded by James Dondero and Mark Okada in 1993, follows firms including Sailfish Capital Partners LLC and Peloton Partners LLP in closing funds after the seizure in financial markets choked of credit and sent asset values plummeting. The average price of actively traded high-yield, or leveraged, loans has dropped to 71.2 cents on the dollar from 100 cents in June last year, according to Standard & Poor's. Dallas-based Highland, the world's largest non-bank buyer of high-risk, high-yield loans last year, also manages collateralized loan obligations and in March raised $1 billion to buy distressed loans. CLOs are created by bundling together loans and repackaging them into new securities. Leveraged loans are rated below Baa3 by Moody's and BBB- by S&P and are used to fund private-equity acquisitions. `Highly Constrained' The firm plans to sell 20 percent of the Highland Credit Strategies Fund's assets in the next six months and a further 20 percent in the following six months, the letter said. ``The environment is one where the fundamental tools to manage the Credit Strategies funds' trading, hedging, shorting and financing are highly constrained, and in some cases unavailable,'' the letter said. The Crusader fund is down more than 30 percent this year, the person said. The fund slumped 14 percent in January after reporting 40 percent gains in 2006 and a 4.5 percent loss in 2007. Hedge funds fell 4.7 percent in September, the $1.9 trillion industry's worst month since the collapse of Long-Term Capital Management LP in 1998, Hedge Fund Research Inc. said earlier this month. The drop has dragged HFR's Weighted Composite Index down 9.4 percent so far this year, on pace for the biggest annual loss since Chicago-based HFR started keeping records in 1990. Citadel Investment Group Inc.'s biggest hedge fund fell as much as 30 percent this year because of losses on convertible bonds, stocks and corporate debt, two people familiar with the Chicago-based firm said yesterday. Kenneth Griffin, who founded Citadel in 1990, said in a letter to investors this week that returns for the $10 billion Kensington Global Strategies Fund may swing wildly as markets are battered by the global credit crunch.