(Bloomberg) -- Swiss investment firm GAM Holding AG shut down one of its biggest fund strategies and suspended a top money manager in a bruising few weeks.
Now comes the tough part: Convincing the remaining clients that the troubles won’t spread to other parts of the business.
Since the firm announced the suspension of Tim Haywood on July 31 and froze his funds, investors have pulled about $2.3 billion from other GAM strategies, according to data compiled by Bloomberg through Aug. 17. While the numbers may not entirely capture firm-wide flows, especially from private funds, they do suggest that redemptions accelerated from July, when clients took out some $800 million.
In a business where even a hint of trouble can touch off a mad scramble for the exits, soothing investors is easier said than done. The freezing of a credit fund at Third Avenue Management a few years ago prompted carnage across the high-yield bond universe as investors rushed to pull their money out. Firms such as TCW Group Inc. and Pacific Investment Management Co. can attest firsthand to the disruptions prompted by the departure of star managers such as Jeffrey Gundlach and Bill Gross.
“For any firm in this position, transparency is a key factor in regaining trust, which is absolutely critical but unfortunately is extremely difficult,” said Jim Smigiel, chief investment officer of absolute return strategies at SEI Investments Co. “GAM’s case is a bit of a perfect storm given that they are a public company.”
Shares of the Zurich-based money manager, led by Chief Executive Officer Alexander Friedman, have lost about a quarter of their value since Haywood’s suspension was announced. The firm is liquidating more than $7 billion in funds previously managed by the bond expert. Redemptions in other portfolios would further reduce assets under management and the fees earned for overseeing them.
GAM says the withdrawals this month reflect more challenging conditions for asset managers broadly. Fund flows started to turn negative in May in Europe, hitting some of the region’s biggest firms such as Standard Life Aberdeen Plc, Jupiter Fund Management and DWS Group.
“Market conditions for asset managers have become more challenging and GAM is not immune from this industry trend,” spokeswoman Elena Logutenkova said in an emailed statement.
Still, the withdrawals so far this month dwarf the roughly $1 billion in outflows from the beginning of May to the end of June, according to data compiled by Bloomberg. The flow figures are estimates and may vary from actual figures.
The biggest carnage during August came in funds managed by Anthony Smouha at Atlanticomnium, whose GAM-branded Star Credit Opportunities strategy is the biggest that GAM offers, with about $12 billion under management. The euro-denominated fund has seen about $570 million in withdrawals since July 27.
Atlanticomnium said in an Aug. 2 statement that that Haywood “never had any connection to the management” of its funds. Smouha said in a separate statement that the price volatility experienced by the market in May is “behind us,” and that the euro zone was “growing strongly and providing a supportive market backdrop for credit.”
“The Star Credit fund may have a comparable investor base to the Haywood funds, so they might also have similar worries,” Michael Kunz, an analyst at Zuercher Kantonalbank, said by phone. "In related areas, the contagion can spread quicker.”
Just how quick was on display in late 2015, when Third Avenue, the firm founded by the late Marty Whitman, decided to freeze withdrawals from a $788 million credit mutual fund to avoid a fire sale. The move immediately sent tremors through the market for high-yield funds and prompted several other firms to freeze or liquidate portfolios.
GAM has said that Haywood’s alleged transgressions were an isolated incident that hasn’t led to losses for clients, and has maintained that the manager’s honesty is not in question. Haywood may have failed to conduct or document sufficient due diligence on some investments, and he may have signed alone on contracts where two signatories were required, according to the firm.
Yet even before Haywood’s suspension and the allegations against him were made public, some investors had started to pull money from his funds, Bloomberg reported on Aug. 16. An asset consultant became concerned about the lack of transparency at GAM, and recommended that clients re-allocate elsewhere because they didn’t get answers to some of their questions, according to people familiar with matter, who asked not to be identified in discussing non-public information. That led to outflows in the weeks leading up the manager’s suspension.
GAM froze Haywood’s funds effective July 31 to allow for an orderly liquidation. While the fund was liquid enough to meet redemption requests at the time, such a move would have left remaining investors with a disproportionate exposure to certain holdings, GAM said. While much of the holdings in Haywood’s strategies were high-quality, liquid assets, he also invested in harder-to-sell instruments.
A fund freeze is a “solution to a crisis scenario,” said Heinz Rothacher, CEO of Swiss asset consultant Complementa. “And this is a crisis.”
--With assistance from Ryan Du Toit and Emily Cadman.
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