The New Star Higher Income Fund fell 15.2%# in September while the FTSE All-Share Total Return Index lost 13.2%#. It was an unprecedented month in the financial markets. The US government looked to shore things up with the nationalisation of Freddie Mac and Fannie Mae and then made an emergency loan to AIG.In the UK, Lloyds TSB bid for HBOS to create what will be the largest UK retail bank, with banking system stability deemed more important than the 30% market share that the combined entity will have. Bradford & Bingley's position was also deemed too precarious and the government nationalised it.The fund's performance was negatively affected by its exposure to HBOS, which fell 61.2% during September despite Lloyds bid. Since the offer is in shares, HBOS shares are now linked to Lloyds's share price, which remained volatile. The value of Bradford & Bingley was written down to zero.While the position was small, this is disappointing. Elsewhere, Cattles, the unsecured lending company, fell 32.7%, pushed lower by fears that the slowing economy would affect the ability of its customers to repay loans.Resilience was provided by the fund's life insurance holdings, which benefited from the restriction on short-selling financial stocks, National Grid and HSBC. The fund's underweight position in mining stocks also benefited relative performance since this sector was the biggest negative contributor to the market.