December 14, 2015
What we’re reading this week
Third Avenue Focused Credit Investor Fund (TFCVX)
This mutual fund announced it will block client redemptions of shares in the future, opting instead for a more orderly exit from the fund. Most mutual funds process redemptions daily but on December 16th shareholders of TFCVX will be moved to a liquidation trust. This is due to large outflows from the fund over the past several months and may speak to larger issues in the bond market itself, not to mention mutual funds invested in the bond market. This is related to several issues: 1) Over the past few years investors have been turning to high yield debt because rates are so low, 2) Bonds are not very liquid, and 3) When investors sell their shares of a mutual fund, the investment managers are forced to liquidate assets to give investors their money. With the bond market as volatile as it has been, liquidating bond assets in a mutual fund can exacerbate losses. In the case of TFCVX, the fund had outflows of almost $1 Billion this year causing a loss of 27% (bond prices and forced liquidations). Perhaps the most frustrating aspect of this scenario is that in 2012, lead fund manager Thomas Lapointe is quoted in an investment newsletter as saying liquidity fears in the high-yield bond space were a “Myth.” You know, like dragons, or unicorns.
Stone Lion Capital Partners L.P., etc.
Elsewhere in the land of mythical beasts, Stone Lion suspended redemptions in its credit hedge funds “after many investors asked for their money back.” The Stone Lion funds manage $400 million and were subjected to “substantial redemption requests” in recent months. The hedge funds were down about 7% through July, at which time they cut off communications to outside investors. The funds have suffered additional losses since then (of unknown proportions) but investor documents indicate the funds manage 24% less now than they did at the end of July. The firm has given no indication of when clients’ money would be returned. Additionally, Lucidus Capital Partners announced it “has liquidated its entire portfolio” and will shut down due to a “redemption notice from a significant investor in October.”
Earlier this year, this Fifa movie, had the bad sense to come out during a large-scale Fifa scandal. Now, “US prosecutors are threatening to punish banks for failing to report suspicious activity on Fifa-related accounts as part of the sprawling corruption probe into world football’s governing body, people familiar with the case told the Financial Times.” I know everyone hates banks right now (still?) but how are they responsible for policing a foreign organization’s finances? I get that they are culpable but aren’t other people, you know, more culpable? I think the sponsors played a much larger part in supporting Fifa, and surely the signs of corruption were visible to not just to banks, but also to sponsors, prosecutors, fans, media executives, players, coaches and casual observers…basically, anyone, anywhere.
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