Yesterday when describing the latest developments surrounding the Natixis-owned, ill-named H20 Asset Management, which has found itself in a toxic spiral of holding illiquid assets yet facing growing redemptions following Morningstar's questioning of the “liquidity and appropriateness” of some of H2O’s corporate-bond holdings as well as potential conflicts of interest, and suspended its recommendation on Wednesday, we reported that the fund unveiled an "ingenious"
way to halt redemptions without actually imposing gates: it marked down the balance of its holdings "to remove incentives for investors to pull even more."
We also asked, rhetorically, whether this plan work?
That's the question as fund managers hope to reverse outflows from a group of H2O funds that saw their assets drop by 1.1 billion euros on Thursday as analysts questioned their holdings.
Less than 24 hours later we have the question: it did not, because on Monday H20 saw its assets decline even more as a group of its largest funds seeing their biggest ever single-day drop. In the fourth consecutive day of accelerating redemptions, the money manager paradoxically named for liquidity - of which it has none as it scrambles to offload its most illiquid holdings - saw six of H20's biggest funds fall by 2.6 billion euros, or about $3 billion, on Monday.
Yet while to most funds the redemption of nearly €6 billion in funds would prove terminal, perhaps H2O will manage to turn the tide - the fund said it received "material" inflows after a slowdown in net outflows since Monday:
H2O AM hereby confirms that the net outflows have slowed significantly since Monday June 24th. In addition, H2O funds received some material inflows on Tuesday June 25th.
On the other hand, it won't be the first time that a fund facing liquidation says pretty much anything to restore confidence.
As Bloomberg notes, the fall in assets comes one day after as H2O said it had sold 300 million euros of the Windhorst-linked holdings on Monday. The sale and a marking down of the non-rated corporate bond holdings across H2O’s range reduced the value of the non-rated corporate bonds to 500 million euros, a spokeswoman said on Monday.
Morningstar raised concerns about the “liquidity and appropriateness” of some corporate-bond holdings as well as potential conflicts of interest last week. The funds, which allow clients to make daily withdrawals, hold rarely traded bonds issued by companies linked to controversial German financier Lars Windhorst investment vehicle Tennor.
So where do we stand: the good news for the fund that may soon join the unhappy procession of investors such as Third Avenue, UK property funds following Brexit, GAM and Woodford which all threw in the towel after their bond holdings were exposed as especially illiquid, is that it had a lot of assets to start the year: H2O’s assets were €32.5 billion at the start of the year. The bad news is that if management is non-GAAPing the truth and redemptions continue, the fund probably has a bout a week of life left if redemptions continue to grow at this rate. And until there is some confirmation that the fund has managed to turn the tide of outflows, there is no reason to expect that H20 will have finally found the oh so critical market substance that it was named for.