A rally in debt and credit after Europe's Central Bank announced cheap finance for banks has helped the Real Estate Credit Investments fund's positions gain 2.4% in January, but could not save it from a £3.2m net loss in 2011's closing quarter.
The fund run by hedge fund manager Cheyne Capital said the recent fall in value came because of mark to market volatility in its universe during Europe's debt crisis.
Fair values in its portfolio fell by an average 1.37% in October, 0.6% in November and 0.62% in December. However, they rebounded by 2.37% in January.
The loss for the last quarter came even though bond prices rose after the European Central Bank improved sentiment towards Europe's banks announcing cheap three-year loans to them in a program called the long-term refinancing operation (LTRO).
RECI said its losses last quarter reflected "broader financial market concerns rather than a fundamental change in the perception of real estate credit risk relative to our assumptions. For example, principal repayments continue to outpace our assumptions with receipts of £1.7m in January 2012.
"The LTRO programme has, for the time being, reduced concerns around the liquidity of European banks and has indirectly provided a buyer of last resort for European sovereign debt. The resultant improved market sentiment has underpinned a strong rally in both credit and equity markets. This has allowed RECI to re-balance its portfolio towards more liquid names."
RECI's loss of £3.2m was about one third the size of the £9.3m loss it recorded for the quarter to 30 September.
RECI said the loss was smaller, thanks to its moving more defensive around June.
By 31 December the portfolio's nominal value was £133.4m, compared to a market value of £77.1m.
"The company retains full confidence in the fundamental investment case of the real estate debt markets and in its ability to generate strong returns in the medium term," the investment company said.
During the last quarter RECI bought £10.1m of bonds at an average price of 68 pence. The average effective yield of purchases during January was 12.14%.
By the end of that month RECI was diversified across 116 bonds. Collateral behind its holdings ranged from nursing homes run by Four Seasons Health Care, London property, Karstadt retail stores in Germany, and UK buy-to-let mortgages.
The largest portion (42%) of its assets was in securities rated BB and below, followed by A-rated (23%), AA (18%), and BBB (17%) .
RECI also bought back 2.8 million of its own preference shares in December.
By 31 January RECI had £10.8m cash. Shareholders will receive a dividend of 0.86p per share for the last quarter.
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