Claren Road Said to Lose 5% on Fannie-Freddie Bet

Fannie Mae and Freddie Mac stock plunged since Sept. 30, when a U.S. District Judge threw out a lawsuit that would have forced the government to share the companies profits with shareholders.

(Bloomberg) — Claren Road Asset Management LLC, the hedge-fund firm majority owned by Carlyle Group LP, slumped 5 percent in the first week of October after its investments in Fannie Mae and Freddie Mac lost about two-thirds of their value, according to an investor in the fund.

The New York-based firm, which had $8.5 billion in assets at the end of August, had accumulated preferred shares in the mortgage-finance companies, said three people with knowledge of the firm, who asked not to be identified because the information is private.

Fannie Mae and Freddie Mac stock and preferred shares have plunged since Sept. 30, when U.S. District Judge Royce Lamberth threw out a lawsuit that would have forced the government to share the companies profits with shareholders. Hedge funds including Bill Ackmans Pershing Square Capital Management LP, and Paulson & Co. had bet on the two companies, speculating Congress or the courts would restore value to the securities.

Fannie Mae shares rose 4.2 percent to $1.74 at 3:03 p.m. in New York, reducing losses this month to 35 percent. One series of preferreds fell 1.5 percent extending losses to 64 percent.

Bruce Berkowitzs Fairholme Capital Management LLC and Richard Perrys Perry Capital LLC sued the government in July 2013, saying it was unconstitutional for it to sweep Fannie Mae and Freddie Mac profits. The government started taking all the earnings two years ago after it unilaterally amended its 2008 bailout agreements with the two companies to replace fixed dividend rates on the almost $190 billion of capital they drew from taxpayers.

Losing Year

The losses at Claren Road, founded in 2005 by Brian Riano, John Eckerson, Sean Fahey and Albert Marino, may cause the firm to post its first losing year. Claren Road was up 0.7 percent for the first nine months of this year, the investor said. Its biggest monthly loss was 1.9 percent in June 2013, according to a client letter.

Carlyle acquired 55 percent of the credit firm at the end of 2010. The firm posted gains of 5.4 percent last year in its main hedge fund.

Randall Whitestone, a spokesman for Washington-based Carlyle, declined to comment on returns and positions taken.

Berkowitzs Fairholme Fund, his main mutual fund with $7.8 billion as of the end of September, has declined 11.7 percent since the decision. Berkowitz said he will continue to fight the government. Perry has appealed the judges ruling.

At least one hedge fund has decided to sell. Bruce Richardss Marathon Asset Management LP told investors in its $12.5 billion firm in a conference call last week that it was selling its preferred shares in Fannie Mae and Freddie Mac, according to two people with knowledge of the call, who asked not to be named because the firm is private.

A Marathon spokeswoman declined to comment.