In 2015, at the peak of the commodity-crush induced wave of energy defaults, a high-yield bond fund at Third Avenue in froze withdrawals to avoid having to divest holdings at fire-sale prices. That set off a chain of events that rattled credit markets and deepened one of the worst selloffs in years.
Fast forward to today, when Swiss multi-billion asset manager, GAM Holdings announced it has frozen withdrawals at some of its bond funds after a surge in redemptions from clients who sought withdraw their money following the suspension of manager Tim Haywood, the latest in a series of setbacks that sent the company’s shares into a tailspin.
GAM's troubles started last month, when as we reported at the time there was market speculation that a market neutral quant fund it had purchased in October 2017, Cantab Capital Partners, was in trouble, with some pointing fingers at AQR. Perhaps, but it turns out that GAM was also involved when the fund warned of a writedown due to losses at one of its quant hedge funds. The announcement launched a slide in its shares that only accelerated after this week’s suspension of Haywood, who headed the firm’s second-largest strategy, and a warning by CEO Alex Friedman that clients may allocate less money to the firm because of volatile market conditions, accelerated the slump.
Quoted by Bloomberg, Chairman Hugh Scott-Barrett sought to soothe investor fears, saying he’s open to all ways to strengthen the stock price.
“The board of directors and the management team are committed to considering all avenues to optimize shareholder value as we continue to build on the many achievements to date," he said in a statement Thursday.
It only made things worse, and as Zuercher Kantonalbank analyst Michael Kunz wrote in a note to clients, the fund freeze "actually brings GAM out of the frying pan and into the fire." The first was certainly raging in GAM's stock price today, which plunged 12% in Zurich trading, wiping out a third of the company's value in the past month.
On Thursday, GAM announced that the redemption halt came into effect on July 31, Bloomberg reports. That day, an investigation into Haywood raised issues with his risk management procedures and record keeping, and GAm said that it had suspended the manager. Trying to prevent fears of a Madoff-style fraud, the asset manager said at the time that the probe had not raised concerns about Haywood’s honesty and that there had so far not been a material impact on investors.
However, while it remains to be determined if Haywood was a criminal, the bigger problem now facing GAM is how to ringfence his losses: the boards of the investment pools "are now considering all future steps, including liquidations, for 7.3 billion Swiss francs of assets managed in the strategy Haywood oversaw."
There is a word for this: firesale.
Although there is enough liquidity to pay investors back, the firm said “such actions would lead to a disproportional shift in their portfolio composition, which could compromise the interests of remaining investors.”
Making matters worse, the assets in the bond strategy are spread over different funds and share classes, making an effective cleanse all but impossible. What is more embarrassing, is that despite the alleged impropriety, the GAM Multibond Absolute Return Bond Fund, which has about €2 billion in assets, still could not outperform the market and according to Bloomberg trailed 92% of peers over the past five years.
Another problem is that Haywood's bond fund was not a "pure play" but was unconstrained, which basically gave Haywood permission to invest in anything and everything that he felt could deliver returns within the broad category of fixed income. And as Bloomberg's Mark Gilbert writes, "GAM, for its part, recognized that the more esoteric the products it offered, the higher the fees it could charge."
And speaking of complexity, Kunz, the analyst at Zuercher Kantonalbank, wrote that Friedman a year ago explained that bond funds Haywood headed had “integrated additional strategies like trade financing into the products.” Haywood also oversaw 2.9 billion francs in trade finance funds and 653 million francs in other fixed-income portfolios.
“All this is reminiscent of the equity funds that in the wake of increased outflows during the financial crisis of 2008 were suddenly sitting on private equity positions that had become entirely too large,” Kunz wrote.
The last major fund freezes in Europe came in the wake of the Brexit vote when investors pulled money from U.K. property funds, fearing real estate values could plummet. That led asset managers to halt redemptions of funds with about 18 billion pounds ($23.6 billion) of assets.
What happens next and do we get a rerun of 2015 when redemption halts snowballed, leading to a sharp drop in the bond market, which then quickly spilled over into other asset classes? Here is what Gilbert thinks happens:
For now, this is a GAM problem rather than one for the broader market. And it’s entirely proper that it should halt redemptions rather than sacrifice values by dumping assets at whatever prices it can get. But it’s a reminder to investors everywhere that – as the financial crisis a decade ago proved – when everyone rushes for the exit at once, values can get trampled swiftly and irredeemably.