How Easy Is it to Unwind $7 Billion of Investments?
(Bloomberg Opinion) -- GAM Holding AG should be applauded for moving swiftly to resolve the crisis engulfing its 7.3 billion Swiss francs ($7.3 billion) of unconstrained absolute return bond funds. But investors are about to learn how easy – or hard – it is to find buyers for such a large group of investments at acceptable prices. It could deliver a costly lesson in the risks of chasing returns in the current less-than-liquid environment.
A quick recap: It's less than two weeks since the Swiss investment firm suspended portfolio manager Tim Haywood and halted redemptions from the funds he oversaw after finding what it called insufficient “due diligence on some of the investments that were made.”
GAM said on Friday it has decided to liquidate the nine funds “to maximize liquidity and value for investors.” Here are five questions that clients should be asking GAM's leaders, including Chief Executive Officer Alexander Friedman, as a matter of urgency.
How big are the redemption requests?
While GAM says it received redemption requests for more than 10 percent of the ARBF funds, it hasn't specified the total amount investors are demanding back. Nor has it detailed how much of the roughly 4 billion francs it managed in the same strategies on behalf of institutional mandates at the end of June is also heading out of the door.
So it's entirely possible that the firm has been asked to repay the bulk of all 11 billion francs allocated to the unconstrained absolute return category – making the job of unwinding its investments that much harder, especially since the firm says it will “ensure equal treatment” for all of the funds' clients.
When can investors expect to get repaid?
To be frank, this doesn't look good. “It is expected that all fund shareholders will periodically receive their proportionate interest in cash as it becomes available throughout the liquidation process,” GAM says.
GAM will clearly offload the most liquid securities first, to deliver at least a partial repayment to investors as early as possible. But there's no way of knowing what percentage of the funds are ossified in illiquid investments – or at what price they might get sold. Or when. Which leads us onto…
Will investors get repaid in full?
This is the 11 billion-franc question. GAM will have to balance how long it makes investors wait for their money with the deterioration of value that a fire sale of assets would trigger. Moreover, the money manager has no control over the market environment; a bond-market collapse, for example, could trash prices for even the more liquid assets owned by the funds.
Will GAM compensate investors for any shortfall?
GAM has already suffered damage to its reputation for freezing and then liquidating the funds. It might decide that compensating customers is worthwhile to defend its credibility.
Moreover, the regulators in the various jurisdictions that the funds operate in, notably Dublin and Luxembourg, won't look too kindly on the conduct breaches that led to Haywood’s suspension.
Have there been redemption requests at GAM funds other than the nine that are being liquidated?
GAM shareholders, who've watched their stock drop by almost 50 percent since the beginning of the year, would be forgiven for wondering how other clients will react to the recent turmoil.
Net inflows in the first half of the year of 2.6 billion francs were offset by negative investment returns. Cantab Capital Partners, the quant firm GAM bought almost two years ago, lost almost 1.6 percent on its Aristarchus product in July, extending its loss for this year to almost 20 percent, Bloomberg News reported last week.
GAM's fund managers can ill-afford the distraction of increased regulatory scrutiny and the embarrassment of having to liquidate an entire category of funds. How much of the 84.4 billion francs the firm's investment management division controlled at the mid-year decides to stay put is a pressing question for investors – and for GAM's board.
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."
©2018 Bloomberg L.P.