Basically, junk bonds are a kind of leading indicator for stocks. The fund had invested heavy in junk bonds and the firm said it made a decision to liquidate the assets.
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Its implosion is a very rare event in the normally-sleepy mutual fund industry and highlights the turmoil rippling through the riskiest parts of the bond market.
Investors who bought the junk bond ETF have fared better than most individual bonds and mutual funds because the ETF trades like a stock.
Another fund, Stone Lion Capital Partners, froze payoffs on their $400 bln debt holdings due to too many investors demanding their money at once.
Third Avenue Management LLC has parted ways with Chief Executive Officer David Barse after the collapse of the company’s junk bond fund last week, the Wall Street Journal reported on Sunday, citing sources familiar with the matter.
Jeff Gary joined Avenue Credit from Third Avenue in 2012, where he was the fund manager until December 2010. Here in the United States, the Dow Jones Industrial Average is down about 600 points over the past week or so, and at this point it is down more than 1000 points from the peak of the market.
“Is this just the tip of the iceberg?”
Quantitative easing – which has added about $3.5 trillion to the Fed’s balance sheet, and will expand the ECB’s balance sheet by more than $1 trillion – has destroyed the valuation mechanisms for government bonds. “The market isn’t closed but funds must be prepared to take a hit if they are going to sell”, says Fridson. Third Avenue and its representatives didn’t respond to requests for comment. Some high-yield funds have lost more than 10 percent of their value so far this year. In September, the agency proposed rules to require mutual funds invested in high-yield debt to do more to make sure they can return investors money when they ask for it.
While the Bank is satisfied fund firms can cope with large withdrawals, it has expressed concern investors do not understand the associated risks.
It held illiquid bonds of some companies that had undergone restructuring in the last 18 months.
The price drops have been so sharp and indiscriminate that some analysts see a chance to buy some types of junk bonds at attractive prices.
“This seems to be a pretty unique situation”.
Most say the sudden flight from junk bonds has more to do with the quake sent through markets last week by NY fund manager Third Avenue Management. That’s because investment banks, which have eschewed risky debt because of Dodd-Frank rules requiring them to hold higher quality assets, are less likely to play the role of market makers of last resort these days.
“We’ve had a recession in the oil patch”. Much of the money from both high-yield and the corporate bond market generally has gone, not to productive investment, but to financial engineering.
“We’re definitely seeing a lot of stress”, said Ashish Shah, head of credit at AB, formerly known as AllianceBernstein. By one account, as much as 25% of the high yield market in the U.S. was exposed to energy and materials at the start of the year. The Federal Reserve is widely expected to raise interest rates on Wednesday for the first time in nine years. But, in general, this increasing spread signals increasing risks associated with low-grade companies and a move by investors to reduce their appetite in these high-risk securities.
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Lasry’s mutual fund has tumbled 11 percent this year, with dividends reinvested, trailing nearly all of its peers, according to data compiled by Bloomberg.
