UBC’s working capital fund, containing $525 million in market investments, suffered an $18 million loss recently due to a crunch in the US subprime loan market. The loss will result in decreased returns, and the University may have cut back on discretionary spending as a result.

The capital fund, which is built mainly from research grants, has invested $122 million in “asset-backed commercial paper” (ABCP) over the last five years.

ABCP is a type of fund that makes money by collecting interest on various types of debt, usually corporate, combined into one entity. It’s usually considered a safe investment, and when UBC invested in this particular fund it had the highest credit rating possible—the same as Alberta’s.

When the University bought in they didn’t know the paper was connected to high-risk subprime loans. Subprime loans, usually used to finance mortgages, are sold to high-risk customers who would not usually qualify for standard rates. The high rates on these loans caused high default rates this summer, precipitating losses of billions. The crises is threatening to drag economies across the world into recession.

“We don’t have a large group of people here that do [investment] research,” said University Treasurer Peter Smailes. Instead, the University hired Dominion Bond Rating Services to asses the make-up of the fund and determine its risk. “In those ratings there was no indication of any subprime investments.”

The exact make-up of the fund hasn’t yet been determined, but Smailes thinks about 8 per cent of it is connected to subprime loans.

“What happened in August was when people came to redeem their stake the market just totally collapsed—it was all frozen,” said Bruce Ralston, the NDP’s finance critic.

The losses came to light Friday when The Vancouver Sun obtained a letter to Ralston from provincial Finance Minister Carole Taylor detailing the situation. In it Taylor notes that while the BC Investment Management Corporation considered investing in similar funds, it decided it wasn’t suitable for the public institutions it directs.

The University and other investors in the fund are working to negotiate a deal to restructure it into a longer-term investment.

The Canadian market currently has $33 billions tied up in similar investments.