Unwinding $7bn of investments

GAM Holding AG should be applauded for moving swiftly to resolve the crisis engulfing its 7.3 billion Swiss francs ($7.3 billion) of unconstrained absolute return bond funds. But investors are about to learn how easy – or hard – it is to find buyers for such a large group of investments at acceptable prices. It could deliver a costly lesson in the risks of chasing returns in the current less-than-liquid environment.
A quick recap: It’s less than two weeks since the Swiss investment firm suspended portfolio manager Tim Haywood and halted redemptions from the funds he oversaw after finding what it called insufficient “due diligence on some of the investments that were made.”
GAM said it has decided to liquidate the nine funds “to maximise liquidity and value for investors.” Here are five questions that clients should be asking GAM’s leaders, including CEO Alexander Frie-dman, as a matter of urgency.

How big are the redemption requests?
While GAM says it received redemption requests for over 10% of ARBF funds, it hasn’t specified total amo-unt investors are demanding back. Nor has it detailed how much of the roughly 4 billion francs it managed in the same strategies on behalf of institutional mandates at the end of June is also heading out of the door.
When can investors expect to get repaid?
To be frank, this doesn’t look good. “It is expected that all fund shareholders will periodically receive their proportionate interest in cash as it becomes available throughout the liquidation process,” GAM says.

Will investors get repaid in full?
This is the 11 billion-franc question. GAM will have to balance how long it makes investors wait for their money with the deterioration of value that a fire sale of assets would trigger. Moreover, the money manager has no control over the market environment; a bond-market collapse, for example, could trash prices for even the more liquid assets owned by the funds.

Will GAM compensate investors for any shortfall?
GAM has already suffered damage to its reputation
for freezing and then liquidating the funds. It might
decide that compensating customers is worthwhile to defend its credibility.

Have there been redemption requests at GAM funds other than the 9 being liquidated?
GAM shareholders, who’ve watched their stock drop by almost 50 percent since the beginning of the year, would be forgiven for wondering how other clients will react to the recent turmoil.
GAM’s fund managers can ill-afford the distraction of increased regulatory scru-tiny and the embarrassment of having to liquidate an entire category of funds.

— Bloomberg

Mark Gilbert is a Bloomberg Opinion columnist covering asset
management. He previously was the London bureau chief for Bloomberg News. He is also the author of “Complicit: How Greed and Collusion Made the Credit Crisis
Unstoppable.”