Sept. 4 (Bloomberg) -- Synapse Investment Management LLC, the hedge-fund manager that oversaw money for German bailout recipient Landesbank Sachsen Girozentrale, shut one of three fixed- income funds because of ``severe illiquidity'' in the market.

The Synapse High Grade ABS Fund was closed and some assets have been sold, said co-founder Mark Holman. The fund's main investor was SachsenLB, the German lender that was rescued last month by fellow state-owned banks. Holman said the fund had no investments in U.S. subprime mortgages.

``We are going to look at starting new funds,'' Holman said in a phone interview from London. ``There are enormous opportunities in the ABS market caused by this enormous deleveraging and we intend to return with a fund that can exploit them.''

Synapse had 500 million euros ($681 million) under management in three funds at the end of July, and now oversees about 300 million euros in the two that remain. The London-based company joins Basis Capital Fund Management Ltd. of Sydney and Bear Stearns Cos., the fifth-biggest U.S. securities firm by market value, in shutting funds after rising defaults on U.S. mortgage loans to borrowers with poor credit records rattled debt markets.

Hedge funds are mostly private and unregulated pools of capital where managers can buy or sell any assets, participating substantially in the profits of the money invested.

Holman and co-founder Graeme Anderson worked at London-based Barclays Plc, the third-biggest U.K. bank, before setting up Synapse last year. ``Barclays has no stake or interest in Synapse,'' Holman said. There will be no job cuts at the fund manager following the closure, he said.

SachsenLB

SachsenLB was put up for sale after it received 17.3 billion euros in emergency financing from Germany's state-owned banks because of soured investments in bonds backed by subprime loans. Landesbank Baden-Wuerttemberg, the largest German state-owned bank, said Aug. 26 it had agreed to buy the bank.

SachsenLB spokesman Frank Steinmeyer wasn't immediately available for comment on the Synapse fund.

The Wall Street Journal reported earlier today that Synapse was forced to shut the ABS fund after SachsenLB asked for its money back. The Journal cited unidentified people familiar with the situation.

SachsenLB joined Germany's IKB Deutsche Industriebank AG in getting funding to help guarantee commercial paper, debt due in 270 days or less. Companies that rely on commercial paper are facing funding shortages as investors refuse to buy debt secured by assets including subprime mortgages.

Basis Capital filed for bankruptcy protection last week for its Yield Alpha fund after the company said investment losses may exceed 80 percent because of defaults from mortgages to people with poor credit histories.

To contact the reporters on this story: David Clarke in Edinburgh at dclarke3@bloomberg.net.

Last Updated: September 4, 2007 10:52 EDT