It may not be a mutual fund like Third Avenue, but Marc Lasry's Avenue Capital Group hedge fund is far more prominent in the investing community, and as such news that it too has been slammed with redemptions from its high yields fund in recent weeks will hardly ease fears about a capital outflow from the junk bond which has sent junk ETFs down 12% for the year and has become the main topic of discussion over the past week following a flurry of reports about panic among holders of below-investment grade bonds.
What is just as surprising is that among its investments, Lasry does have a mutual fund, in fact two of them - the Avenue Credit Strategies Funds, an open- and close-ended fund, which as we first showed last Friday using the following Morningstar table, are not only among the worst performers year to date, but have tumbled by a whopping 9% in the past three months.
Fast forward to last night when according to Reuters, Avenue's founder, billionaire Marc Lasry, was forced on Monday to back the junk bond mutual fund hemorrhaging assets at his Avenue Capital Group "as jittery investors exit high-yield bonds amid a market rout."As a result, the size of the fund has been cut by more than half, sliding from $2 billion to just $884 million according to Lipper, roughly the same size where Third Avenue's own high yield fund was when it announced it would liquidate and gate investors.
Despite his defensive posture, Lasry hardly sounded too enthusiastic about the pace of outflows: "I think overall redemptions at some point are going to slow down across the market," Lasry said. "I'm not sure if that will be tomorrow or next week, but people are going to start putting money back into the market at some point."
The reason for the sudden redemption wave is not only the overall weakness among junk bonds, but as Reuters notes, investors have taken note that Lasry's $884 million Avenue Credit Strategies Fund is run by the same portfolio manager who in 2009 helped launch the Third Avenue Focused Credit Fund, which abruptly shut down last week and blocked investor redemptions, fund disclosures show.
In January 2012, Jeff Gary joined Lasry from Third Avenue, where he once ran the now defunct fund. Gary left Third Avenue in December 2010.
Cornered, Lasry had to show the "distinctions" between the two junk bonds in a telephone interview with Reuters, saying that Third Avenue's fund had an estimated 20 percent of its assets in illiquid, hard-to-trade securities.
“We have a diversified and well-positioned portfolio and our illiquid assets are in the single digits,” Lasry said about his fund. Lasry's Avenue Capital, has about $12 billion in assets, compared with less than $10 billion at Third Avenue Capital.
The Avenue Credit Strategies Fund's total return is minus 10 percent this year, underperforming the 3.83 percent average decline in the junk bond category, according to Morningstar Inc. And investor withdrawals have accelerated since March, cutting the size of the fund from $2 billion to $884 million, according to Lipper Inc.
By contrast, Third Avenue's junk fund was down nearly 30 percent before it closed with about $800 million in assets. Both funds bet on debt issued by companies in stressed situations. Third Avenue, though, focused some of its investing on bankruptcy-related claims, which are considered extremely hard to trade even during good times.
Despite his spirited defense, Lasry's work may be cut out for him: Brad Alford, chief investment officer of Alpha Capital Management in Atlanta, who had invested in both the Avenue Capital and Third Avenue funds, said Third Avenue's liquidation shocked the mutual fund industry. Alford sold out of both the Third Avenue and the Avenue Capital funds earlier this year.
"It has shaken to me to the core. Who else can do this?" he said.
We may soon find out, because even with his attempt to sound optimistic, when redemption waves come, they rarely stops on a dime if at all, and there is only so much capital outflows a fund, mutual or hedge, can take before it is forced to take a time out, either temporary or permanent. Avenue will be no different.
The only question is whether Lasry, who is a close personal friend of the Clintons - recall Chelsea Clinton launched her "career' by working as an "analyst" at the very same Avenue Capital in the mid-2000s - and who was slated to become US ambassador to France until his ties to a shady poker ring were exposed in 2013, will use his executive privilege and request special treatment by the former, and soon future, first family.
If so, that will be the first case of a hedge fund bailout by the presidential family in history, and will make the political farce that are US capital markets even more comical.