Earlier today, a third HY domino fell as the $900 million Lucidus Capital Partners announced that after an October redemption request by a “significant investor,” the fund has liquidated and will return money to investors.
If you’re a Lucidus investor or counterparty, CEO Christon Burrows “thanks you for your support.”
The Lucidus liquidation comes on the heels of last week’s news that Third Avenue and Stone Lion Capital have suspended redemptions in a (likely futile) attempt to avoid going down in history as the guys who started the HY firesale.
As Bloomberg’s Richard Breslow explains, for investors whose funds are locked up in junk debt and other distressed “assets”, the temptation may well be to tap into money held in funds whose managers eschewed riskier debt for more liquid investments.
In short, prudent managers become the “piggy bank” as the HY gates multiply, meaning investors raising cash end up dumping the good stuff while the redemption suspensions force them to hold onto everything that's bad even as the market continues to deteriorate in front of their very eyes.
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From Bloomberg's Richard Breslow
Two high-yield bond funds, Third Avenue’s Focused Credit Fund and Stone Lion Capital, announced last week that they were unable to meet their redemption request obligations and were freezing client money. This raises all sorts of questions, many of which were asked and (not?) answered back in 2007-2008. What I would really want to know this time is are the funds being run in the spirit as well as the letter of the offering documents or pedal to the metal with other peoples money?
- Liquidity didn’t suddenly dry up last week. We’ve been talking about this potential problem non-stop. Just what were they doing to keep ahead of this? The reality is, in some environments, certain strategies will suffer. A prudent investor will have a portfolio of strategies, but the individual fund is focused on one thing
- Has there been style drift to compensate for market conditions? This is a nice way of saying, are you really doing exactly what you say you are doing? As a fund investor, you at least want to know what risks you are actually taking. The problem, of course, is that style drift is most likely to happen when a fund is struggling
- Some funds allow for a certain amount of opportunistic dabbling, also known as “side-pockets.” You want to know if they are actually talking special opportunity or a hail Mary
- One of the troubled funds is a mutual fund and meant to be carefully regulated. Just what does highly monitored actually mean? As an investor, am I getting what I thought I was paying for? Complex instruments available to retail
- One issue most funds will struggle with is defining an actual strategy for when correlations race to one. For the last six years it has consisted of buying the dip. Dip meet rate hike
- One of the sad side-effects, is successful strategies, with liquid investments that are built for volatile markets and have no gates, become the piggy-bank for everyone that needs cash. Investors end up liquidating the good ones and are forced to keep the bad ones