![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
Credit funds: Behind the rhetoric
As fund after fund succumbs to emergency measures to halt redemptions, shore up funding or sell off structured credit assets, the terms used to describe them are too often blurred and confused.
By June 26, the Bear Stearns fund had used $1.6 billion of the $3.2 billion available from the bank in the form of a secured financing facility. Meanwhile, BSAM’s High-Grade Structured Credit Enhanced Leverage Fund, although not receiving any support funding, was having trouble with its $1.2 billion of repurchase agreements.
Three weeks later, on July 18, Bear Stearns warned investors in the funds that they could expect to see little of their investment back. The High-Grade Structured Credit Strategy Fund could only return 9% to investors, and nothing could be expected on the other fund. The reason for this loss was clear: BSAM had been trying to de-leverage the funds, but the market price for subprime loans and collateralised debt obligations of asset-backed securities (CDOs of ABSs) had tanked. Mark-to-market losses had caused the funds’ dealers, including Merrill Lynch (on June 21), to seize and auction collateral (see Bear Stearns bails out hedge fund with $1.6 billion injection).
Jump forward to the most recent funds to run into trouble, and it seems like a similar story, with redemption requests and collateral seizure leading to the sale of assets at fire-sale prices and a consequent marking down of portfolios. But look beneath the surface and the story is different.
When BNP Paribas was forced to suspend redemptions for three of its funds on August 9, some observers marked this down as yet another imminent collapse. Unusually, the bank also suspended its net asset value (NAV) calculation for the funds in question: Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia. The bank blamed evaporation of liquidity in some US securitisation markets, saying that “it is no longer possible to value fairly the underlying US ABS assets” in the funds.
Such a statement was bound to cause a furore, and the French regulator requested a meeting with the bank to discuss its management of the situation. However, on August 23, two weeks after the suspension was announced, the bank said it intended to resume trading on two of the funds on August 28 and on Parvest on August 30. This was partly due to the availability of a new pricing mechanism that uses market indexes to extract pricing information and the application of illiquidity factors to issuers.
There is a clear distinction between those funds that have direct and attributable subprime losses, in terms of both default and mark-to-market losses, and those that have suffered from contagion and negative investor sentiment.
Of those in the second category, two funds with little or no exposure to subprime assets were forced to suspend investor redemption requests as the turn in sentiment and pricing made it difficult to manage the funds effectively. Frankfurt-Trust Asset Management, a Frankfurt-based collateralised loan obligation investor, suspended redemptions on its FT-ABS-plus fund on August 6. At the same time, Union Investment Management suspended redemptions on its ABS-Invest fund for the same reasons, despite the manager's claim that the fund had less than 6% exposure to US subprime ABS. Florida-based United Capital Asset Management also suspended four of its funds on July 3 after redemption requests, including one from a single investor who accounted for 25% of the firm’s invested capital.
In contrast, Sydney-based hedge fund Basis Capital suffered as a result of mark-to-market hits on its portfolios, and was unable to meet margin calls. As a result, banks seized collateral on its Basis Yield Alpha and Basis Pac-Rim Opportunity funds. On August 30, the Basis Yield Alpha fund filed for bankruptcy protection in the US, citing a more than 80% loss in the portfolio. The manager had suspended NAV calculations on its funds on July 24.
A version of this article appears in the September issue of Risk.
See also: Bear Stearns bails out hedge fund with $1.6 billion injection
Bear Stearns funds have "lost almost all value"
Sovereigns step in as ABS funds reel
German contagion looms as funds buckle
Re-evaluating valuation
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Structured products
A guide to home equity investments: the untapped real estate asset class
This report covers the investment opportunity in untapped home equity and the growth of HEIs, and outlines why the current macroeconomic environment presents a unique inflection point for credit-oriented investors to invest in HEIs
Podcast: Claudio Albanese on how bad models survive
Darwin’s theory of natural selection could help quants detect flawed models and strategies
Range accruals under spotlight as Taiwan prepares for FRTB
Taiwanese banks review viability of products offering options on long-dated rates
Structured products gain favour among Chinese enterprises
The Chinese government’s flagship national strategy for the advancement of regional connectivity – the Belt and Road Initiative – continues to encourage the outward expansion of Chinese state-owned enterprises (SOEs). Here, Guotai Junan International…
Structured notes – Transforming risk into opportunities
Global markets have experienced a period of extreme volatility in response to acute concerns over the economic impact of the Covid‑19 pandemic. Numerix explores what this means for traders, issuers, risk managers and investors as the structured products…
Structured products – Transforming risk into opportunities
The structured product market is one of the most dynamic and complex of all, offering a multitude of benefits to investors. But increased regulation, intense competition and heightened volatility have become the new normal in financial markets, creating…
Increased adoption and innovation are driving the structured products market
To help better understand the challenges and opportunities a range of firms face when operating in this business, the current trends and future of structured products, and how the digital evolution is impacting the market, Numerix’s Ilja Faerman, senior…
Structured products – The ART of risk transfer
Exploring the risk thrown up by autocallables has created a new family of structured products, offering diversification to investors while allowing their manufacturers room to extend their portfolios, writes Manvir Nijhar, co-head of equities and equity…