And just like that last week's junk bond debt fund liquidation and redemption suspension, which first struck at the mutual fund giant Third Avenue and promptly spread to a hedge fund launched by the former heads of distressed and high yield trading from, get this, Bear Stearns, and was supposed to be quietly buried, went front page and nuclear following a WSJ report that the CEO of Third Avenue, David M. Barse, who had been with the company for 23 years, has been fired.
The less than amicable "parting of the ways" follows the decision to gate withdrawals from its junk-bond fund which as we reported on Friday, roiled all asset classes, and sent junk bond prices to the lowest level since 2009.
The WSJ adds that a security guard at the firm’s New York headquarters said Sunday that Mr. Barse had been let go and isn’t allowed back in the building.
Mr. Barse had led Third Avenue since 1991, according to the company’s website, and is a large shareholder. He was the public face of the firm’s announcement Thursday that it was closing its $789 million Third Avenue Focused Credit Fund and would bottle up investors’ money for months or more as it tries to liquidate its assets.
The move roiled credit markets Friday and sparked widespread concern about other mutual funds with large holdings of corporate junk bonds.
Mr. Barse didn’t reply to requests for comment. Third Avenue and its representatives didn’t respond to requests for comment.
This dramatic escalation now means that every single hedge and mutual funds will spend all Sunday night and Monday morning trying to ferret out any bonds that are especially illiquid or are mispriced (based on the traditional hedge fund mismarking methodology of marking an illiquid bond pretty much anywhere one wants because in the absence of an active market, that's precise where the price is: anywhere). It also means that what was already an illiquid market will, paradoxically, get even worse as BWIC after BWIC slam trading desks, and cause panic as stunned PMs ask themselves just what cockroaches are hiding in their own balance sheets.
As a result, instead of looking for bargains, everyone will be eager to dump as much illiquid exposure as they can since nobody wants to be the next David Barse.
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Finally, here are some final thoughts from JPM on what one should be on the lookout for as fund liquidations and gates suddenly become the entire story, ironically enough, in the week in which Yellen is supposed to hike rates to demonstrate how solid the economy is and how stable financial conditions are.
This week’s experience also exposes the major disadvantage of mutual funds relative to ETFs in terms of “first mover advantage” in periods of stress: with bond ETFs trading continuously during the day like equities and with prices able to deviate significantly from their end-of-day NAV, the first move advantage disappears. In other words this deviation from NAV represents the market mechanism by which the first move advantage is cancelled.
In all, redemption gates appear to be a rather problematic tool relative to other options such as redemption fees in the debate on how to prevent runs in the mutual fund industry in the future.
Another issue that arises from this week’s decision by Third Avenue Management to suspend redemptions from its Third Avenue Focused Credit Fund is about the cash levels of bond mutual funds. How healthy are these cash balances overall to prevent a more widespread repeat of Third Avenue’s redemption suspension?
ICI data allow us to calculate the cash balances as % of assets for both HG and HY bond mutual funds in the US. These cash balances are shown in Figure 4. The cash balances of HY bond funds had risen in September and October but they remain rather low by historical standards. HG bond funds look less vulnerable than HY funds, but they have seen steady erosion of cash balances since mid 2014. In other words HG bond funds look a lot more vulnerable relative to a year a go.
We look forward as first bond, then stock, then all other mutual funds seeks to shore up cash balances in the aftermath of the Third Avenue fiasco. Or, in other words, as everyone tries to sell at the same time.