H2O’s Illiquid Misadventures Aren’t Over Yet

Natixis SA’s decision to sell its majority stake in H2O Asset Management ends the French bank’s association with the hedge fund. H2O’s customers, however, remain victims of the firm’s foray into illiquid securities. It remains to be seen when — and if — they’ll get all of their money back.

What soured the relationship between Natixis and H2O was the asset manager’s dalliance with debt issued by German entrepreneur Lars Windhorst. In June of last year, the Financial Times reported that the fund had bought private bonds issued by companies controlled by Windhorst. That prompted fund research company Morningstar to suspend its rating on one of H2O’s flagship funds.

Investors took fright, pulling billions of euros from H2O, with the scale of the exodus reaching 8 billion euros ($9.8 billion) by the end of that month. At the same time, H2O revealed that it had written down the value of the Windhorst bonds it held by between 40% and 80%, after Natixis intervened to make it record them at “transactional value” — fire sale prices. 

In May, H2O agreed to sell the private investments back to Windhorst. Bloomberg News reported that Windhorst was seeking financing to repurchase notes with a face value of more than 2 billion euros at a discount of about 50%. In other words, H2O would forgo about 1 billion euros to unwind the positions.

A month later, H2O suspended redemptions from several of its funds after the French regulator intervened due to what it called “valuation uncertainties on the significant exposure of these funds to private securities.” The asset management firm then split each of the funds into two: Investors ended up with a so-called mirror fund they were free to redeem, as well as a side-pocket fund that held the illiquid securities that they’re still not allowed to get their money back from.

The funds, including Adagio, Allegro and MultiBonds, had 8.3 billion euros of assets when they were unfrozen on Oct. 13. In the following three days, customers withdrew about 430 million euros. But they’re still not allowed to redeem the side-pocket funds.

In September the firm said the transaction to sell the bonds back to Windhorst had been “delayed.” H2O currently says it expects the repurchase to be completed by June of this year. But it’s still not clear what price, if any, it will be able to extract for the bonds.

The firm, founded by Chief Executive Officer Bruno Crastes and Chief Investment Officer Vincent Chailley, has taken a hit as a result of its misadventure in hard-to-trade, impossible-to-value securities. It oversaw about 20 billion euros at the end of September, down from about 30 billion euros at the start of 2019.

H2O is still capable of generating significant alpha. In November alone, for example, its 2.7 billion-euro MultiBonds fund delivered returns of 10.55% net of fees. If only the firm had stuck to its undoubted expertise in global macro investing, rather than chasing additional yield in illiquid private debt.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

©2021 Bloomberg L.P.

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