In the wake of the September 16 turmoil in Turkish markets, fund managers have discovered a liquidity shortage. That can lead to uncomfortable questions about investor rights, but the bottom line is a manager’s need to buy time, which may be at odds with an investor’s plans for the money. One of them gets to change the timetable, however.
Turmoil in the Turkish market played out on September 16 to the delight of traders in all markets except, it seems, Turkey. In the seconds before Borsa İstanbul’s market-wide circuit breaker secured an orderly close to the session by halting the index’s free-fall at 16:04:32, it was no fun to be watching the BIST 100 lose 6% or more. Anyone who happens to be an investor in one of the funds around which dark clouds have gathered at Tera Portföy may find it considerably less enjoyable than the developments taking place now related to the trading halt are.
Tera went into low-frequency, monthly pricing for two of its funds (TLY and DOH) that now require payments ten business days after their valuation for only certain classes of fund unit. It is also in notices of default in fund-unit redemption payments related to two other funds (THF and TP2). It should be clear, however, that Tera did not voluntarily shift to monthly pricing. What should have been the easy process of getting out of these funds has proven to be very difficult indeed now.
An announcement of a potential change to future redemption terms should not be lumped in with a failure to make a payment already due, no matter how many uses of the terms liquidity management are included.
Taken together, two notices that failed to inform investors about either the cause of the wider market’s decline or the urgency of the question of who will be supplying cash and when, reveal nothing.
If an investor is to be asked to give a manager a little time rather than settle up immediately, as would normally be their right, then it follows that an investor should also want to know exactly what that manager plans to do with whatever additional time they are being granted. Asking a seller to wait while an injection of capital is awaited is a reasonably optimistic interpretation of the situation, but waiting for a receiver to be paid, or for someone else to sell them an asset, is a lot less desirable.
Investors given little information on what extra time will solve, should be a lot less inclined to agree to grant it.
If you’re contemplating a plan with low chances of actually working, the one advantage is that at least you get to describe the monthly pricing carefully. What you can’t avoid for long are the holdings underlying the portfolio, which will continue to be changing in value, making it hard to get away with just moving the date of valuation for a month off. Not when your investors are going to have their exit price fixed-set at the next valuation, and so know the amount and the date on which they will receive it. Of course, if this exit price is usually made payable ten business days after the order, you can try and be devious and claim that it meant ten business days after you have invented a future monthly valuation. Making it awkward for your investors who have decided to leave, and have to carry on bearing the investment risk while they are waiting for the price to be fixed. But if you care so little about the devious ones, you probably don’t care that if the portfolio recovers while the decision to sell didn’t actually do anything to end the exposure, and if it falls further, it’s true that the decision to sell was right, but not on the timings.
Assuming that I need to raise the $10 million, I sell my securities to Sam today and agree to buy them back from him next month at an agreed price. Sam advances the cash and holds the securities in the meantime. There can be no guarantee that if I cannot complete that repurchase, someone else will pay him the same amount for the securities. While Sam might cut me some slack in terms of the repurchase price, depending on the market conditions at the time, he is probably going to want some haircut, or additional margin, to protect himself. Everybody concerned is actually better off if the securities can eventually be sold. When the time comes to actually sell them, yes, the contract will matter, but so will the market. ICMA has spelled all this out, including the possible risks for the collateral. The good thing about repo is that it has largely mitigated the risks caused by its structure, but that does not mean they do not exist.
Sam, as the cash provider, needs to know that the securities he is holding really fit this bill. To elaborate on all those things that are carefully avoided in our example, the arrangement gets a touch harder still if the money borrowed is of a sort that its providers expect to have prompt access to it.
An illustration of the mechanism for establishing the role of particular funds in the transactions. We can look at transaction records showing which funds were matched with which counterparty, in what amounts, with what collateral, and with what repayment deadline. Plenty of ways to know something will be safe absent a repo counterparty (we know there’s collateral), but part of a proper assessment of risk is not just knowing that there’s collateral, it’s being able to form an expectation, however imprecise, about how much that collateral will sell for, in what quantity, at what discount, and how that value will not be impaired along with the borrower’s cash.
It’s the classic bad news. You may be able to sell a troublesome holding with a perfectly observable market price, but that may just be tough luck if you also need to sell a large relative amount of that position in order to be satisfied. Alternatively, you may be able to sell something else instead — that doesn’t get you off the hook for worrying about how you will meet the next payment, but potentially gives you something you don’t need. Or rather your remaining investors will be holding a portfolio of which the harder exit will ultimately have consequences and someone will need to wear, maybe in the form of transaction costs or a loss or something else.
I have a bit of an issue with the rhetoric of protecting investors: it’s just so vague. Which investors? For what period? From what particular loss? I know what they mean, of course, they just seem to aim rather more broadly than is strictly deserved when the benefits they stand to enjoy by the action they’re considering will be accruing to a certain demographic and the costs to another.
Is a fund manager being disingenuous if he says he’s doing this to serve everyone? Of course, they’re always serving someone a little more than someone else on occasion. There are just too many variables conflicting for it to go any other way.
I don’t fault TP2 for pursuing a measure in order to recoup any defaulted redemption-payment; I hope they manage to, I would think that anyone still invested in the money market fund would share that feeling. It just rankles with me, how they seem to imply the investor who chose to remain invested did so merely to have the satisfaction of watching others not get at their cash, rather than thinking they would also have access to the fund, which they did indeed expect and had every right to.
A temporary liquidity shortage is one way of describing the situation at Tera. An adequate description for sure, possibly even an accurate one. But of no real use, unless you’re an investor in the firm’s equity fund, who really ought to have a detailed understanding of how, and when, any repayment is likely. And: if it will be made with the help of new borrowing, what the terms of that borrowing are likely to be.
Though additional financing may be welcome if it enables a fund to avoid a damaging sale today, in itself it doesn’t indicate whether it’s going to be a sensibly choice. If the new borrowing goes down as a new line on the fund’s interest payments, or maybe even a pledge of its assets, it’s more likely to prove unwise. But deciding whether something is a sensibly choice, or not, requires a lot of work behind the scenes.
For an equity fund, the end is sure. A lender will provide the cash needed, ie the investor can expect to be paid. Tracing the connections behind the accounts reveals a more complicated picture, and different implications. All are likely to be accurate accounts - a clear account of the exposures is vital - but you cannot infer the connections by looking for things that share a manager, or have overlapping holdings, or had a bad day in the market.
I saw one recent fund presentation in which they asked for more time to make payments. It’s good to know it’ll allow them to concentrate on collecting their receivables, but knowing that doesn’t tell me if they are asking for more time because they are facing a temporary funding interruption and need to arrange financing, or if they want to be able to take a little more time to value and allocate losses that haven’t been recognised yet.
Extending the calendar doesn’t tell me which situation it is. Don’t get me wrong, I’m happy that they are making the practical decision to stop and concentrate on getting things right, I just wish they weren’t making the practical decision to stop and extend the period between order and pay!
When I next look at entry and exit terms, I think I’m going to spend a bit more time checking how much flexibility each side has to change the timetable, what happens to the orders already submitted when someone does make a change, who carries the market risk while an order is waiting to be priced and what happens if they miss the payment date.
It will be rather easier to settle these questions when you still have the option of putting your money somewhere else rather then when you have already crossed the deadline for withdrawal.
Related:
Turkish Funds With $7.5 Billion Assets Default on Redemptions
La Bolsa turca se desploma un 9% en tres sesiones por los problemas de una gestora de fondos