Saturday, December 12, 2015

Mutual Fund Run for PEU Bonds!

MarketWatch reported:

A high-yield mutual fund is blocking investors from withdrawing their money, in a rare and jarring move amid a severe downturn in below-investment-grade and distressed debt.

The move at Third Avenue Focused Credit Fund is intended to facilitate an orderly liquidation of the fund, which recently had $789 million in assets, down from more than $2.4 billion earlier this year.
Third Avenue Management's shareholder letter states:

"Investor requests for redemption, however, in addition to the general reduction of liquidity in the fixed income markets, have made it impracticable for FCF going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders."
Third Avenue's investment theory failed.  Here's their take:

When we launched FCF in 2009, we expected not only to add a differentiated product to our fund line-up which complemented our platform but would hopefully provide outsized returns in the credit markets, including investments in special situations. As the Fund grew over the years, we were able to find unique and special investments. Unfortunately, the present environment has harmed our ability to successfully implement that strategy.
Wow, how hard is it to say we made the wrong investments/bets in low grade corporate bonds?  Many private equity affiliates floated bonds to fund deals and special dividends for their PEU owners. 

A Bloomberg story showed another indicator of the current turbulence:

"...over the past two months as BlackRock Inc., Fortress Investment Group and Bain Capital closed hedge funds after running up losses."
It's an interesting time when the big money boys but no longer trust one another to make good on their debts or bets.  Panic, like greed, ain't pretty.