July 24 (Bloomberg) -- Basis Capital Fund Management Ltd., the Australian hedge fund manager battered by losses in the U.S. subprime mortgage market, hired Blackstone Group LP as an adviser to help avoid a fire sale of assets.

Blackstone, already helping Bear Stearns Cos. liquidate two hedge funds, will advise Basis Capital ``to prevent adverse pricing and selling of assets,'' the Sydney-based firm said in a statement today. Basis Capital, which had assets of $1 billion as recently as May, said July 18 that the value of its Yield Alpha fund may fall more than 50 percent if assets are sold at distressed prices.

The losses at the fund, which recorded an average annual return of 15.5 percent for the past five years, underscores the global impact of the subprime shakeout. Federal Reserve Chairman Ben S. Bernanke said July 19 that there will be ``significant financial losses'' from risky mortgages, pointing to estimates as high as $100 billion.

``The fallout from subprime is likely to impact most asset classes and investment strategies over the next couple of years because the ratings agencies completely goofed up,'' said Peter Douglas, founder of Singapore-based hedge fund research firm GFIA Pte. ``Basis Capital is viewed as a bellwether.''

Basis Capital's Aust-Rim Opportunity Fund and the Yield Alpha fund lost 9 percent and 14 percent respectively in June. The funds ran into trouble by investing in the unrated, riskiest portions of collateralized debt obligations. These portions, also known by bankers as ``toxic waste,'' are first in line for any losses when borrowers fall short on mortgage payments.

Delinquencies Rise

Sophia Harrison, a spokeswoman for Blackstone in London, declined to comment about the firm's role with Basis Capital. The Australian firm was founded by Steve Howell and Stuart Fowler, who worked together at County NatWest, in 1999. It was named ``Fund of the Year'' at the 2005 AsiaHedge awards and Macquarie Bank Ltd.'s ``Skilled Manager of the Year'' in 2004.

Delinquencies on U.S. subprime mortgages -- home loans to people with poor credit -- surged to a 10-year high this year after borrowing costs rose.

While sales of CDOs -- used to pool bonds, loans and their derivatives into new debt -- rose fivefold to $503 billion last year from 2003, investor appetite for the securities is now waning. Analysts at New York-based JPMorgan Chase & Co. said yesterday that CDO sales dwindled to $3.7 billion in the U.S. this month from $42 billion in June.

Credit Markets

The extent of the asset declines such as those at Basis Capital and Bear Stearns Cos. is masked by the reluctance of investors to buy or sell the illiquid securities, said Sarah Percy-Dove, the Sydney-based head of credit research at Australia & New Zealand Banking Group Ltd.

``Every single CDO is very different,'' she said. ``To get somebody to price a CDO at all can be difficult because people won't price something they don't understand.''

Bear Stearns, the fifth-largest U.S. securities firm, said July 18 that investors in its two failed hedge funds will get little if any money back after ``unprecedented declines'' in the value of securities used to bet on subprime mortgages.

The losses triggered a selloff across credit markets because of concerns that CDO declines would mean losses for holders of even the least risky debt and that fewer sales of new CDOs would reduce demand for bonds and loans.

S&P Downgrades

The Basis Capital funds, which were open to individual and institutional investors, had the highest five-star ratings from Standard & Poor's before the ranking was put ``on hold'' July 17. This means the rating is being reviewed because ``issues potentially affecting the management of the fund have emerged,'' according to S&P's Web site.

David Erdonmez, a fund analyst at S&P, said the revaluation of Basis's assets had triggered margin calls from investment banks that have seized and begun to sell off assets. S&P today kept the funds on hold after meeting with management.

Investors have criticized S&P, Fitch Ratings and Moody's Investors Service, saying their ratings on bonds backed by U.S. mortgages to people with limited credit didn't reflect the rising default rate. They often gave top ratings to the securities. Some bonds have lost more than 50 cents on the dollar this year while their credit ratings haven't changed.

Australian Market

``This won't be the last fund in Australia or overseas to find itself in financial difficulty because of U.S. subprime,'' said Mark Bayley, a Sydney-based director in credit and structuring at ABN Amro Holding NV.

Mariner Bridge Investments Ltd., another Sydney-based asset manager, wrote down its U.S. residential mortgage-backed securities portfolio on July 20 to 26 percent below face value on subprime losses. Mariner said A$36 million of its A$302 million in assets was invested in U.S. residential mortgage-backed securities.

Australian investors, mostly individuals, had A$675 million in the two Basis funds, the Australian Financial Review said July 19. Hedge funds in Australia are open to retail investors, unlike in the U.S. where the largely unregulated pools of capital are generally limited to institutions and wealthy individuals. The funds' managers participate substantially in any gains on the money invested.

To contact the reporter on this story: Laura Cochrane in Melbourne at cochranel3bloomberg.net.

Last Updated: July 24, 2007 10:43 EDT