Carlyle Capital Corporation (CCC) Hedge Fund The Carlyle Group, a well-known alternative investment firm that manages over $100 billion in assets, established Carlyle Capital Corporation (CCC) in 2007. CCC was a hedge fund that was publicly traded on the Amsterdam stock exchange with the Carlyle Group retaining a 15% ownership stake. CCCs investment strategy was to borrow capital at short-term rates and purchase long-term AAA-rated mortgage bonds. CCC purchased bonds issued through Freddie Mac and Fannie Mae with the expectation that these bonds were low risk. This expectation of low risk was because Freddie Mac and Fannie Mae are U.S. government-sponsored entities and it was implied that the U.S. government would guarantee any bonds they issued. To increase returns, the fund employed leverage of about 32 times. This leverage meant that the CCC was able to hold nearly $22 billion in mortgage securities with less than $700 million of equity. Of course, this high level of leverage meant that the portfolio decline of more than 3% would result in the $700 equity value being completely erased. In early 2008, the AAA-rated mortgage bond lost significant value and the CCCs lenders began to seize the majority of the funds collateral. The fund ended defaulting on its loans in March because it has become insolvent. The time between its initial public exchange listing in July 2007 and collapse in March 2008 was a mere eight months. While the companys share price was $20 at launch, equity investors lost their entire investment by mid-March.

1. What was the main trading strategy of the hedge fund? Why did the hedge fund collapsed?