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How To Determine If Your Fund Is At Risk Of Runs, Gating And Liquidation, In One Chart

Tyler Durden's picture




 

In light of surging concerns about mutual and hedge fund fixed income (and soon other asset classes) "gating", "runs" or outright liquidation, Deutsche Bank has prepared the following infographic which summarizes the main choke points which predispose both open and closed-end funds to runs or outright shutdown.

And some DB's commentary on the difference between open-end and closed-end funds:

Differences between open-end and closed-end investment trusts

 

The biggest difference between open-end investment trusts and closed-end investment trusts is in whether or not assets under management can be reduced and surrendered to individual redemption requests.

 

For open-end investment trusts, investors buy in with new money, and fund managers use the funds to increase purchases of corporate bonds and other assets for investors. When investors surrender the funds, corporate bonds and other assets are sold to raise funds to cover the redemptions (although some funds have cash pools).

 

For closed-end investment trusts, a certain amount of funds are collected when trusts are established and invested from the outset. Unless there are additional offerings, redemptions, or other changes, there are no fund inflows or outflows (except dividends received, cash distributions, etc). Consequently, closed-end investment trusts can have low liquidity assets. However, they provide sales opportunities via listing at exchanges (ETFs, etc.) or setting redemption targets.

 

No risks from closed-end funds?

 

Today, open-end funds are generating the greatest concern. With providing day-to-day cashability, they have expanded long duration and illiquid securities rapidly since the financial crisis. Maturity/liquidity transforming is viewed as a characteristic of shadow banking practices.

 

For closed-end investment trusts, investors cannot make withdrawals from the funds, so run risk is believed to be low. However, this is true only in relative terms. Risk does exist. For example, listed REITs can be sold and made cashable in a matter of seconds, but it takes several months to sell asset holdings. This entails major maturity and liquidity transforming. When ETFs, REITs, MLPs and other assets are used as leverage (for borrowing), asset holdings are subject to fire sale risk because of the difficulties in using them as fundraising vehicles.

* * *

It is precisely this fire sale risk that we have seen in real time for the past several days.

 

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Mon, 12/14/2015 - 12:29 | 6921779 Looney
Looney's picture

The music is still playing, although it sounds like a funeral.  ;-)

Looney

Mon, 12/14/2015 - 12:40 | 6921785 The Juggernaut
The Juggernaut's picture

I'd love to see what the HY Alt investments internals look like.  Deflation before hyperinflation.  The MuFu industry will be bailed out... just watch.

Mon, 12/14/2015 - 12:32 | 6921787 hedgeless_horseman
hedgeless_horseman's picture

 

 

The music is still playing...

Run to the Hills
Run for your lives

Mon, 12/14/2015 - 12:47 | 6921864 KnuckleDragger-X
KnuckleDragger-X's picture

Yeah, but there ain't as many chairs this time.......

Mon, 12/14/2015 - 12:56 | 6921909 Fuku Ben
Fuku Ben's picture

+1 If you advance 2 songs on that playlist 2 Minutes to Midnight comes up. Which I've been pointing out for quite a few months now. I hope someone's been paying attention or learned what that meant by now and planned accordingly. If not they just received last call.

http://www.zerohedge.com/news/2015-08-17/8-reasons-why-telegraph-thinks-...

http://www.zerohedge.com/news/2015-11-24/its-fake-fake-fake-america#comm...

Mon, 12/14/2015 - 14:18 | 6922279 RichardParker
RichardParker's picture

I think I hear them playing Led Zeppelin's When The Levee Breaks;

https://www.youtube.com/watch?v=ddpl1zl5sYg#t=4m07s

Mon, 12/14/2015 - 12:29 | 6921783 cowdiddly
cowdiddly's picture

Easy I'll just lift up the mattress. Nope, no risk.

Mon, 12/14/2015 - 15:49 | 6922737 cro_maat
cro_maat's picture

There were some fish swimming near my stash last week but the risk diminished when they found that th shiny was inedible.

Mon, 12/14/2015 - 12:34 | 6921806 WTFUD
WTFUD's picture

Many a tear has to fall, but it's all, in the Game.

Mon, 12/14/2015 - 12:45 | 6921856 OceanX
OceanX's picture

"Sooner or later everyone sits down to a banquet of consequences." - Robert Louis Stevenson

Mon, 12/14/2015 - 13:40 | 6922088 kralizec
kralizec's picture

Risk shmisk!

#BanquetLikeTheRedWedding

Mon, 12/14/2015 - 12:48 | 6921866 Ajax_USB_Port_R...
Ajax_USB_Port_Repair_Service_'s picture

Ah, "gating" is such a benign, gentle word for 'disaster'.

Mon, 12/14/2015 - 12:53 | 6921905 rsnoble
rsnoble's picture

An easier way to determine these risks:  Do you live on Earth and are you not a member of a bush people tribe.

Mon, 12/14/2015 - 12:53 | 6921910 Niall Of The Ni...
Niall Of The Nine Hostages's picture

There's no such thing as a risk-free asset or a run-free bank. Even gold can be stolen by big men who assuredly have more firepower than you do---with or without a tip-off from a "loving" wife.

Keep the treasures you cannot afford to lose safe in heaven. Accept that all earthly investments have a risk of loss.

Mon, 12/14/2015 - 13:07 | 6921952 Quinvarius
Quinvarius's picture

Does it really matter why a banker tells you your money is not available?  Do their reasons even matter?  Why the Hell would they care if they had to sell someone elses stuff?  The most likely issue is they don't have the money or the assets and they Madoffed everyone.    

Mon, 12/14/2015 - 13:59 | 6922179 Sudden Debt
Sudden Debt's picture

What about those tripple short ETF's?

Mon, 12/14/2015 - 14:02 | 6922201 Colonel Klink
Colonel Klink's picture

No need to worry about where the gates are if you're out of the rigged casino "market".

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