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Natixis’s H2O Lost $3.4 Billion in Three Days of Carnage

Bloomberg logo Bloomberg 25/06/2019 Nishant Kumar, Lucca de Paoli and Suzy Waite

File picture of City of London, England © Getty Images File picture of City of London, England The tide is turning for H2O Asset Management, the London-based investment firm that until last week defied industry gloom with surging assets and stellar returns.

After almost a decade of near-constant inflows, clients last week started to yank money from some of its funds over concerns about illiquid holdings tied to a controversial German businessman. The carnage worsened on Friday, the latest day for which figures are available, with assets in six of its funds down more than 3 billion euros ($3.4 billion) over just three days to less than 19 billion euros.

A representative for H2O declined to comment.

a screenshot of a cell phone: Sharp Drop © Bloomberg Sharp Drop

H2O, founded with the backing of French investment bank Natixis SA, fought back hard with a series of measures meant to assure investors it can meet redemptions while making it more painful for those seeking to get out. The goal: to avoid the type of fund freeze that has thrown Swiss asset manager GAM Holding AG and famed U.K. stock picker Neil Woodford into turmoil.

Among the measures taken hastily over the weekend: the sale of some 300 million euros of unrated private bonds and a mark-down of the remaining ones. It’s an unusual step for a firm that last year introduced entry fees of as much as 5% to limit the inflow of new cash after rapid growth left several funds near full capacity. Now the firm, whose total assets under management exceeded $32 billion at the end of 2018, is dropping the entry fees altogether and said it will appoint an independent auditor to restore investor confidence.

Outsized Returns

“The developing events will hit the brakes on H2O’s growth,” said Jonathan Tyce, a senior analyst at Bloomberg Intelligence. Investors will “try and assess whether this was an isolated incident over concentration of the bonds in question or if there is anything else to worry about.”

The sudden reversal in money flows is testing a firm that produced outsized annual returns of 20% and more in some of its funds. Co-founded by Bruno Crastes and Vincent Chailley in 2010, the firm uses bonds and currencies to bet on macroeconomic developments and leverage to juice returns.

Managing the risk needed to get such returns is proving easier when money is coming in. As Warren Buffett famously put it during the 2008 financial crisis, “you only learn who has been swimming naked when the tide goes out.”

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H2O’s troubles started after the Financial Times showed the exposure of several of its funds to companies related to Lars Windhorst, a German financier with a history of troubled investments. Morningstar Inc., an influential research firm used by investors as a guide to buy or sell funds, subsequently suspended its bronze rating on the H2O Allegro fund on Wednesday over concerns about the “liquidity and appropriateness” of some of its holdings.

In the three days after Morningstar put the fund’s rating under review, Allegro’s assets under management have dropped by around 650 million euros, according to data compiled by Bloomberg.

The move led jittery investors, still reeling from star stock picker Neil Woodford’s decision to freeze withdrawals from his flagship fund, to start yanking cash from H2O funds. The Allegro fund, which returned 10% through June 19 this year on top of a 28% gain last year, suffered a record drop in assets on Wednesday and another one on Thursday.

a close up of a map: A Rising Tide © Bloomberg A Rising Tide

Even with those stellar returns, worries over the ease with which securities in open-ended funds can be traded have caused investors to head for the exits in the last year. H2O and Woodford have both faced questions over whether they’ve circumvented liquidity restrictions by re-packaging assets that are rarely or ever traded. GAM meanwhile is still in the process of unraveling hard-to-sell securities from a bond fund it froze last year.

Natixis shares fell 12% last week as worries over how its star money manager would be affected by the liquidity concerns at some of its funds. The share move can be partly attributed to the fees that H2O has generated for the bank, thanks to the performance of its money pools. One strategy, H2O Multibonds, made more than 30% for its investors last year, according to data compiled by Bloomberg.

“They’ve had amazing performance over three years,” said Jacob Schmidt, CEO of Schmidt Research Partners, a global investment firm.“Not many funds can say that. The interesting part here is with the risk management and compliance at H20 and why they didn’t pick up on these illiquid positions. Having daily liquidity with such illiquid investments is ridiculous.”

--With assistance from Kateryna Hrynchak.

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