Over A Billion Frozen As Investors Pull Money From Multi-Billion Fund Manager

At the start of August we reported that 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. 

Tim Haywood

GAM's troubles started in July amid market speculation that a market neutral quant fund GAM 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 "unconstrained" 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.

Fast forward to today, when GAM Holdings said it would start paying back investors in its frozen bond funds, but some will get money out faster than others. According to Bloomberg, the Swiss fund will initially return 74% to 87% of the assets in Luxembourg and Irish-domiciled funds that were previously run by suspended bond manager Tim Haywood. Investors in Haywood’s Cayman Islands-based hedge fund will only get about 60% in early September, with another 5% expected by the end of that month and the remainder paid out over time depending on market conditions.

In other words, over a billion in investor funds will be indefinitely frozen in a GAM side pocket due to "illiquid" conditions, which is strange considering the S&P just rose above 2,900 and if there was ever a market that was liquid, it is now. One dreads to imagine what would happen to fund that had to satisfy redemption requests when asset prices were falling.

And while GAM investors were shocked by the July 31 announcement that it had suspended Haywood, triggering a flood of redemption requests and forcing the firm to freeze affected funds, fears quickly spread and some investors in separate strategies also pulled money, leading to an estimated $2.3 billion in net outflows through Aug. 17.

According to Bloomberg calculations, the liquidation schedule suggests that the strategy’s hard-to-sell holdings are particularly concentrated the Cayman hedge fund, which had about $2.79 billion in assets before it was frozen.

Hedge funds generally can hold a larger share of illiquid investments than funds that are sold to the general public. But the Cayman fund may also have been impacted when Australian investors pulled hundreds of millions just prior to Haywood’s suspension after an adviser changed its recommendation.

And this is where a potential scandal may be brewing, because as Bloomberg reported earlier this month, an Australian feeder fund that funneled money to the hedge fund lost about A$849 million ($624 million), or three quarters of its assets, within a few weeks. The amount was equal to roughly 18% of total assets in the hedge fund strategy. And, as Bloomberg noted previously, GAM had said that withdrawal requests of more than 10 percent within a short period of time would typically trigger a reporting requirement.

To be sure, the company finds nothing untoward in the redemption:

GAM said before that the redemptions from the Australian feeder “followed business as usual meetings with a consultant, which did not include any discussion on the subsequent suspension of Tim Haywood.”

We leave that one to the regulators.

For now, the bigger question is just what was Haywood investing in that made it so illiquid. It turns out that while much of the holdings in Haywood’s strategies were "high-quality, liquid assets" such as Treasuries, he also invested in harder-to-sell instruments among which the the Absolute Return Bond Fund listed transactions with Liberty Industries PPA Limited, a vehicle linked to Sanjeev Gupta’s Liberty House Group conglomerate. The fund had also invested in Laufer Limited, a funding vehicle linked to supply-chain finance provider Greensill.

As we reported previously, the fund also 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.

Hardly liquid.

Meanwhile, sensing trouble ahead, the fund's board of directors and management "unanimously felt that suspension was absolutely the right course of action when faced with a cumulative pattern of potential misconduct," GAM said, adding that a public announcement was required as Haywood had responsibility for a significant proportion of GAM’s assets under management.

The board then threw Haywood under the bus:

GAM has said that Haywood may have breached due diligence requirements and signed contracts alone where two signatures were required. Haywood also breached the company’s gifts and entertainment policy by not seeking the required pre-approval and used his own personal email for work, the company said this month.

But don't worry: the company vows that Haywood’s alleged transgressions were an isolated incident that hasn’t led to losses for clients, and has maintained that the manager’s honesty is not in question.

Judging by the rising redemptions across funds that were not directly controlled by Haywood, the investing public is not exactly convinced.

As for what happens next to GAM, Zuercher Kantonalbank analyst Michael Kunz said that "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."