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December 14, 2015 at 07:33 AM
Top bond managers are predicting more carnage for high-yield investors amid a market rout that forced at least three credit funds in the past week to wind down.
Lucidus Capital Partners, a high-yield fund founded in 2009 by former employees of Bruce Kovner’s Caxton Associates, said Monday it has liquidated its entire portfolio and plans to return the $900 million it has under management to investors next month. Funds run by Third Avenue Management and Stone Lion Capital Partners have stopped returning cash to investors, after clients sought to pull too much money.
“It could get pretty ugly this week,” Michael Contopoulos, high-yield strategist at Bank of America Corp., said in an interview with Bloomberg TV’s Stephanie Ruhle. “The most recent sell-off has not been fundamentally driven,” he said, citing constrained dealer balance sheets as a factor.
Debt of struggling companies has slumped, with one market gauge falling to a six-year low, as declining energy and commodity prices hit producers just as the Federal Reserve prepares to raise borrowing costs for the first time in almost a decade. Scott Minerd, global chief investment officer at Guggenheim Partners, predicts 10 percent to 15 percent of junk bond funds may face high withdrawals as more investors worry about getting their money back. He joins money managers Jeffrey Gundlach, Carl Icahn, Bill Gross and Wilbur Ross in warning of more high-yield trouble ahead.
Third Avenue rattled markets when it announced Dec. 9 that it’s liquidating a $788.5 million corporate debt mutual fund and delaying distribution of investor cash to avoid bigger losses. Chief Executive Officer David M. Barse is leaving, the New York- based money manager said today.
Barse Leaving
“The risk is that this is going to cascade into something bigger,” Minerd, whose firm oversees $240 billion, said in an interview Friday at his oceanfront office in Santa Monica, California. “If we’re going to see contagion, the most vulnerable funds are going to be the ones that are down significantly.”
The SPDR Barclays High Yield Bond ETF, a proxy for the high-yield market, fell 0.5 percent at 10:04 a.m. in New York, its third straight day of losses. The exchange traded fund slumped 2 percent on Friday, its biggest one-day drop in four years. Many funds had bigger losses Friday, and shares of most high-yield ETFs were trading below the value of their assets.
Icahn, a billionaire who has been betting against high- yield, has criticized high-yield ETFs for giving less sophisticated investors easy access to a market whose risks they may not fully understand. He said in a post on Twitter Friday that the selloff in the debt is only getting started.
Lucidus Liquidates
Mutual funds are required to let clients pull out on a daily basis, and ETFs even provide intraday liquidity. That makes them less suitable to invest in hard-to-sell assets. Hedge funds typically have more time to realize gains in such investments, but they can also take more risk and they often use leverage, or borrowed money, to amplify gains. If a trade goes wrong, that leverage will leave them with bigger losses.
Lucidus decided to wind down the portfolio after receiving a redemption notice from a significant investor in October, according to a person familiar with the fund’s operations, who asked not to be identified speaking about internal deliberations. Lucidus’s two main investment vehicles had been on track for their second straight losing year, declining 1.9 percent and 4.1 percent through November this year, according to the person.
Stone Lion, a New York-based firm with $1.3 billion under management, said Friday it’s suspending redemptions at a $400 million credit hedge fund after clients asked to pull too much money.
‘Other Whitmans’
“The real question is going to be how many hedge funds go bankrupt,” said Gundlach, whose firm oversees $80 billion.
The Third Avenue Focused Credit Fund in many instances had purchased 10 percent or more of smaller bond offerings. Such large positions in infrequently-traded debt can make it difficult to exit. Third Avenue was the biggest holder of one set of bonds issued by bankrupt power producer Energy Future Holdings Corp., according to data through July 31.
