On July 21, 2015, The Wall Street Journal reported on a growing number of hedge funds who are looking to profit from an anticipated decline in the prices of exchange-traded bond funds (ETFs) and liquid alternative funds. (“Hedge Funds Gear Up for Another Big Short”)
Among the hedge funds, cited in the article, who are reportedly lining up in anticipation of potential trouble at some “alternative” mutual funds and bond exchange-traded funds that have boomed in popularity among retirees and other individual investors are Leon Black’s Apollo Global Management LLC, Oaktree Capital Management LP and Reef Road Capital LLC.
The predicate for their investment thesis is that the junk bonds, bank loans and esoteric investments held by some of those funds will be extremely hard to sell if the market turns, leaving prices pummeled in a rush for the exits.
As noted in the article, “critics said both sets of products suffer from a similar weakness. They promise investors the ability to trade in and out as they would with a stock, but the underlying securities trade far less frequently, meaning there may not be buyers waiting when the funds line up to sell.”
If this prediction should come to pass, the hedge funds would then offer the liquid-alternatives funds and bond ETFs cut-rate prices for thinly traded holdings like low-rated corporate debt and bank loans when they are forced to sell to meet daily redemptions.
Just last month, for example, it has been reported that BlackRock, Inc. asked the SEC for permission to borrow from some of its mutual funds to pay redemptions in others. A spokeswoman for BlackRock is quoted as having said the firm’s liquid-alternative products were among those it may use to take advantage of the practice. The SEC decision is pending.
If you are an individual or institutional investor who has any concerns about Bond ETF or Liquid Alternatives investments having been recommended for purchase in either your retirement or non-retirement accounts, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).