Friday, December 11, 2015

Which "Junk" Fund Liquidates Next? After Third Avenue, Here Are The Unusual Suspects

"The shocking fate of Third Avenue's junk bond fund, which as we reported yesterday, announced it would gate investors and proceed to liquidate over the next several months as it sought to unwind its illiquid positions at a leisurely pace "without resorting to sales at prices that would unfairly disadvantage the remaining shareholders" is made just modestly less shocking when one considers that the $789 million fund (down from $2.4 billion earlier this year) was the worst performing YTD fund tracked by Morningstar, tumbling 27% YTD, but only after placing in the top 1%-percentile in 2013.
It is made less shocking when one considers that the fund, or rather its holdings, may have been the target of coordinated selling by other hedge funds who had smelled blood in the water, and decided to short all of Third Avenue's top holdings, holdings which were particularly illiquid and thus any attempts to sell in size would very likely be met by either gaping bid/ask spreads or, more likely, a bidless market.
This is the essence of the WSJ article which explains that "part of the reason the Third Avenue fund ran into deep problems, traders said, is because it purchased investments that have become much harder to trade and have been steadily losing value as investors fled energy and other kinds of riskier debt in recent months. That squeezed the fund as redemption requests rose sharply this year."
Among the Focused Credit Fund’s largest holdings is a bond from media company iHeartCommunications Inc., formerly known as Clear Channel Communications Inc., according to Morningstar data. The bond traded recently at about 30 cents on the dollar, after trading at 80 cents at the start of the year, according to MarketAxess Holdings Inc.

In recent days, it has been harder to find traders willing to buy debt the fund holds, including energy company Magnum Hunter Resources Corp. and troubled Spanish gambling company Codere SA, traders said..."


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