Derivatives knock out Oppenheimer's Champion Income fund

It's been a good week for Oppenheimer funds. They lost hundreds of millions with Madoff, and now a junk bond fund they oversee is down over 82%; it's demise hastened by derivative bets gone bad. Was that in the prospectus?

Senior Vice President Angelo Manioudakis, who headed the firm's Core Plus team, resigned Friday. The team managed more than $16 billion in individual-investor-oriented fund assets. Under Mr. Manioudakis, investments in the likes of mortgage-backed securities and credit-default swaps went awry.

Those woes fueled an 82% drop at its flagship junk-bond mutual fund, Oppenheimer Champion Income, one of the worst showings among the roughly 150 U.S. junk funds that invest in high yield, or below-investment-grade, bonds. The average junk-bond fund is down 32% in 2008....

But OppenheimerFunds owns Tremont Capital Management, an investment-management firm that put hundreds of millions of investors' dollars into funds overseen by Bernard Madoff, who, authorities said, admitted to carrying out a $50 billion Ponzi scheme..

One problem bet involved total-return swaps, which are basically agreements between parties to exchange cash flows in the future based on how a set of securities performs. In this case, the fund was betting that top-rated commercial mortgage-backed securities would rally this year. They didn't....

Credit-default swaps, or CDSs, have hurt the fund, too, declining $238 million through September. CDSs are basically insurance contracts that protect investors against bond and loan defaults. In exchange for being on the hook to pay out for such issues, CDS sellers receive a stream of interest payments.
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