TAG | 1861 Capital Municipal Enterprise Offshore Fund Ltd
The 1861 Capital Management Funds collapsed in February 2008, and resulted in devastating losses to it’s investors.
Municipal bond arbitrage is considered a very complicated, risky investing strategy that involves trades of municipal bonds, short-term notes, and interest-rate derivatives. In recent years, a growing number of hedge funds, including 1861 Capital Management, began to employ municipal arbitrage, buying long-term municipal bonds that had slightly higher yields and pocketing the difference. The funds then hedged against large fluctuations in interest rates by essentially reversing that trade, using taxable securities.
Municipal bond arbitrage also entails additional risks because in order to bolster returns, hedge funds must pile on the leverage.
So signs of trouble first appeared at the beginning of 2008, when municipal bond yields became hammered from the downturn in the markets. As a result, many hedge funds suddenly found themselves forced to liquidate their leveraged positions.
These two facts – risk and leverage – that have become a bone of contention for many investors in municipal arbitrage hedge funds. As reported in a January 2009 study from the Securities Litigation and Consulting Group (SLCG) on the recent failure of leveraged municipal bond hedge funds, some 36 hedge funds – 1861 Capital Management among them – were marketed and sold to investors as “high yield, low-risk alternatives” to traditional municipal bond funds.
Nothing could have been further from the truth. All of the hedge funds featured in SLCG’s study contained considerably more risk than investors ever realized. They also produced significantly lower-than-expected returns. In the end, investors suffered to the tune of billions of dollars in losses.
It is believed that UBS sold the following fixed income arbitrage funds: 1861 Capital Municipal Enterprise Domestic Fund, LP, 1861 Capital Municipal Enterprise Offshore Fund, Ltd., 1861 Capital Discovery Domestic Fund, LP, and 1861 Capital Discovery Offshore Fund, Ltd.
Other securities brokerage firms, including UBS, misrepresented the 1861 Capital Management Funds as safe and secure fixed income products that were particularly suitable for retirees and the elderly, and failed to adequately disclose the true speculative nature and substantial risks inherent in these investments.
Hedge funds like 1861 Capital Management and ASTA/MAT were marketed by many brokers to investors as high-yield, more conservative alternatives to money-market fund or traditional municipal bonds. In reality, this was far from the truth. Not only is leveraged municipal bond arbitrage at the opposite end of conservative, but it also can produce lower-than-expected returns for investors and bring considerably more risk.
If you are a victim of the alleged fraudulent schemes of your agent or broker, in particular USB, regarding the ASTA/MAT, 1861 Capital collapse, or any fraudulent sale of hedge funds through any of its agents, call a FINRA Securities arbitration lawyer for a free consultation on how to recover your losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA and the NFA.
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