An Italian pension fund which, like so many others, wanted a piece of the hedge fund action at the height of the market – but found itself heavily exposed when Lehman Brothers (LB) collapsed – has succeeded in cutting its losses by more than $60 million.
The fund had put €780 million into a structure devised by LB which was designed to reap the benefits of investing in a stable of 200 hedge funds. The fund’s capital was protected by a put option, by which its money would be switched into ‘safe’ assets if the value of its investment fell below a certain level.
After LB filed for bankruptcy protection in America, the put option was automatically terminated and the fund came under great pressure from the Italian government and its members to safeguard its position. It ultimately entered into a replacement transaction with another bank in order to protect its capital.
The fund launched proceedings against LB to recover the losses it had incurred due to the put option’s termination. However, it was LB’s case that, had procedures laid down in the agreement been properly followed, the fund could have entered into an alternative transaction at a much more beneficial rate. On that basis, LB calculated that the fund owed it more than $42 million.
However, in upholding the fund’s claim, the High Court found that it had accurately calculated its loss at $61,507,902. It was awarded that sum, plus interest. The evidence did not support the ‘faulty’ alternative calculation put forward by LB and the Court ruled that the fund owed it nothing.