Moments ago, we learned courtesy of the head of Mutual Fund Research at Morningstar, Russ Kinnel, that the next leg of the junk bond crisis has officially arrived, after Third Avenue announced it has blocked investor redemptions from its high yield-heavy Focused Credit Fund, which according to the company has entered a "Plan of Liquidation" effective December 9.
Third Avenue says outflows would have forced them to accept "prices that would unfairly
disadvantage the remaining shareholders."
— Russ Kinnel (@RussKinnel) December 10, 2015 [7]
The redemption block takes place after the fund lost some 27% in 2015, with assets plunging by a whopping 66%.
[8]
Not surprisingly, the fund is in the worst percentile with 100% of funds outperforming [9]YTD, however we can only assume that it had accumulated its $789 million in AUM (down from $2.4 billion earlier this year) as a result of being in the top 1% in 2013 [10].
This is what happened, according to the fund manager:
We believe that, with time, FCF would have been able to realize investment returns in the normal course. Investor requests for redemption, however, in addition to the general reduction of liquidity in the fixed income markets, have made it impracticable for FCF going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders.
As a result, all shareholders will be equally disadvantaged.
How long will investors have to wait for the "Liquidating Trust" to become, well, liquid? Quite a while:
In line with its investment approach, FCF has some investments in companies that have undergone restructurings in the last eighteen months, and while we believe that these investments are likely to generate positive returns for shareholders over time, if FCF were forced to sell those investments immediately, it would only realize a portion of those investments’ fair value given current market conditions. We believe that doing so would be contrary to the interests of all of our shareholders, which is why we have taken steps to protect shareholder value by returning cash and implementing the Liquidating Trust to seek maximum value for these investments.
At least it won't cost you anything:
Third Avenue will manage the Liquidating Trust in order to obtain the best overall outcome for the beneficiaries. Third Avenue will not charge any fee for those services.
Finally:
Third Avenue is extremely disappointed that we must take this action.
So is everyone else:
Here is the official statement [11]:
[12]
A history of the fund from Bloomberg:
Then again, as Kinnel snydely notes...
PIMCO Total Return handled $100B in outflows without missing a beat but Third Ave Foc Cred is thrown by $1.3B in a year.
— Russ Kinnel (@RussKinnel) December 10, 2015 [13]
What this means is that now that the dreaded gates are back, investors in all other junk bond-focused hedge funds, dreading that they too will be gated, will rush to pull what funds they can and submit redemption requests, in the process potentially unleashing a liquidity - and liquidation - scramble within the hedge fund community, which will first impact bonds and then, if the liquidity demands continue, equities as well.
For those curious, here are the top holdings of the fund:
[14]
Keep a very close eye on HYG and JNK now that gates are officially back after a 7 year hiatus.
