As Australian hedge fund managers stare down the barrel at their first major league disaster, the crisis at the $1 billion hedge fund group, Basis Capital, is set to spark a fresh examination of hedge fund exposure.

Unfortunately, many of the key players in the unfolding drama are refusing to explain their actions publicly, accelerating investor fears for their superannuation savings.

Basis Capital controlling partners, Stuart Fowler and Steven Howell have gone to ground and paid a high price for their lack of communication- The Australian newspaper today published a picture of Howell’s home in the prestigious Sydney cliff top suburb of Curl Curl.

Meanwhile, the management of Victoria’s Combined Fund – a superannuation fund for teachers in private schools – has also stayed silent as concerns grows among more than 9,000 teachers with money at risk. Combined Fund has an estimated $21 million sunk into Basis Capital funds.

The $430 million Combined Fund is flanked on Basis Capital’s Top 20 shareholders register by WA Local Government Superannuation Fund, the Van Eyk Blueprint Fund and the Rubicon Australian Leaders Fund.

In Perth, the Princess Margaret Hospital Foundation – the investment unit of a children’s hospital – is also listed as a top-20 shareholder. The hospital appears to have $3 million of its total of $17 million in funds invested in Basis Yield.

Last Thursday, Basis Capital announced that its Basis Yield Fund was in default, and investors were looking at getting back less than 50c in the dollar. There has been no further clarification of potential losses at the fund since then.

Overseas hedge funds have shaken confidence in US markets over the past two months, two Bear Stearns hedge funds have had to be supported by the injection of more than $3 billion after revealing big trading losses.

An investigation by Eureka Report has revealed that some of the country’s top-performing funds are using hedge funds, including CDO funds to propel their returns. There is no suggestion these top performing funds are linked with Basis Capital.

However, leading Australian superannuation funds – including two funds that came in the top five balanced funds in the year to June – are defining their hedge fund holdings as defensive, a move that allows the funds to top up risk in “aggressive equity” holdings with further risk assets in hedge funds.

Catholic Super, the best-performing fund manager last year, splits its flagship Catholic Super Balanced Fund into 70% growth assets and 30% self-described “income’ assets”. On closer inspection the income assets are held two-thirds in alternative assets, including hedge funds and property. In effect, the group only has 10% of its assets in traditional defensive allocations of cash (5%) and fixed income (5%).

Westscheme – another top-five fund last year – has even less in traditional defensive assets with just 5% in cash or fixed interest while its hedge fund holdings also include a direct exposure to CDO (Collateralised Debt Obligation) funds. Westcheme’s Target Portfolio Fund has 4.6% of its assets in CDOs.

As asset consultants and rating agencies try to explore the depth of the fund crisis – the blue chip rating agency Standard and Poor’s may regret announcing Basis Capital as one of the ‘Hedge Fund Managers of the Year’ for 2007.

This is an edited version of “Careful How You Hedge Your Bets” from www.eurekareport.com.au.