
Growing Unease as British Mutual Funds Block the Exit Doors - jstreebin
http://www.nytimes.com/2016/07/08/business/dealbook/growing-unease-as-british-mutual-funds-block-the-exit-doors.html
======
cesarb
I believe every fund has a clause like that in their rules, at least all the
ones I've seen so far do: in case of exceptional lack of liquidity, or so many
requests to get out of the fund that it would compromise the liquidity, the
administrator is allowed to temporarily forbid getting out of the fund.

What these funds do is sort of similar to statistical multiplexing. They keep
part of their assets as liquid stuff like cash or easy-to-sell government
bonds, and the rest is longer-term stuff that takes more time and effort to
convert into cash. Normally, requests to get out of the fund can use only the
more liquid part, which will be gradually replenished from the less-liquid
part. If there are too many people trying to get out at the same time,
however, the more liquid part can get depleted, and were it not for that rule,
the fund would be forced to sell the less liquid part at a loss, to the
detriment of the remaining holders.

~~~
tacostakohashi
Although this is indeed how mutual funds work, there are other models:

[https://en.wikipedia.org/wiki/Closed-
end_fund](https://en.wikipedia.org/wiki/Closed-end_fund)

Can't be redeemed, can only be sold on the open market to a new buyer - e.g.,
ADX.

[https://en.wikipedia.org/wiki/Exchange-
traded_fund](https://en.wikipedia.org/wiki/Exchange-traded_fund)

Can only be redeemed for the underlying basket of stock (not cash), so the
administrator doesn't have any liquidity problems to contend with - e.g., SPY.

Are these better, or worse than the mutual fund model? It's hard to say - with
the closed-end fund setup, it's likely that they'd just end up with a deep
discount to their nominal asset value in times of selling pressure, but at
least you can still get out if you need to, and it creates a good buying
opportunity for those with spare cash in tough times.

~~~
Blackthorn
Even ETFs can have similar issues to mutual funds when the underlying asset is
illiquid. ETFs will trade at an immense discount as the fund is sold faster
than the underlying can be shorted. This happened to $JNK recently.

~~~
eru
How long did that last? Longer than a day?

(Seems like a huge arbitrage opportunity, otherwise.)

~~~
Blackthorn
It's not really accurate to call it arbitrage if you can't simultaneously
short the underlying. You'll be looking at something (imo) not unlike pin
risk. And just like pin risk...well, it's risky.

JNK wasn't as bad as I remember, according to the stats on Morningstar it had
a discount of 1.15% at the worst.

~~~
eru
I meant in a more general sense: it's closer to something uncertain like
statistical arbitrage.

Thanks for looking up the numbers. 1.15% seems entirely reasonable compared to
having your money locked up.

------
twinkletwinkle
Am I misunderstanding this line:

"So far, the numbers are small enough. Of the 35 billion pounds, or $45
billion, invested in these funds, just under £20 billion has been affected."

What? More than half? And that's considered insignificantly small?

~~~
foota
It's possible that the first part is a typo and should be trillion?

~~~
towlejunior
Total global wealth is $250 trillion. British mutual funds can't be one-fifth
of it, no matter how well invested.

~~~
foota
Thanks for the reality check. aab0 seems to have the right of it, they cite a
different article that goes into more detail about the funds in question
[http://www.nytimes.com/2016/07/07/business/dealbook/3-more-p...](http://www.nytimes.com/2016/07/07/business/dealbook/3-more-
property-funds-halt-withdrawals-after-brexit-vote.html?ref=dealbook)

edit: I'm still wrong, but it seems British mutual funds are an appreciable
fraction of total global wealth
([https://en.wikipedia.org/wiki/List_of_institutional_investor...](https://en.wikipedia.org/wiki/List_of_institutional_investors_in_the_United_Kingdom#Mutual_funds))

double ninja edit: that's not right. I don't really understand what the
figures on that page are supposed to represent... anyone want to try clearing
it up for me?

~~~
zhte415
I will clear it up for you: The numbers on that page are meaningless and
misleading.

Firstly, the AUM column in the table doesn't represent anything. It overstates
their _global_ AUM by 2 to 20 times for the companies I checked.

Secondly, this is by no means an exhaustive list of institutional investors in
the UK. There are, well, I don't know but there are a huge number of small
nameless investors sitting in the UK investing private funds globally, that
are not and never will be on this list and whose assets will never be known,
only estimated.

------
carsongross
Reminiscent of the 2007 BNP Paribas suspensions that were some of the first
indications of systemic failure:

[http://www.nytimes.com/2007/08/09/business/worldbusiness/09i...](http://www.nytimes.com/2007/08/09/business/worldbusiness/09iht-09bnp.7054054.html)

We are due for another credit heart attack. Private debt is too large (see
Steve Keen's work) and there is no stomach for fixing it. Most economists
don't recognize that that's the problem.

~~~
tosseraccount
"The Big Short" Scion Fund managers restricted withdrawals, too.

[
[http://www.nytimes.com/2007/03/09/business/09insider.html](http://www.nytimes.com/2007/03/09/business/09insider.html)
]

 _Either way, chaos created opportunity and Scion investors might feel lucky
that they were locked in the castle._

The subprime mortgage market finally imploded causing the Great Recession.

If you are confident of credit crisis, perhaps you can do your own shorting.

~~~
carsongross
I'm fairly confident of one but, of course, timing is difficult and carry
costs of short positions are high (they nearly killed Scion) so I prefer to
simply wait out the market.

------
tvladeck
This seems to me very analogous to preventing a run on banks. Traditionally
retail banks would invest their depositors' savings in real estate by
financing mortgages. Indeed - in England many banks are still called "building
societies".

Depositors are in principle able to get their money back at any time, but this
is possible only because a small fraction will want to at any one time.

But when there's a "run on the banks" in a financial crisis, banks can't
satisfy the withdrawal demands of every depositor simultaneously - except
through distressed sales that only exacerbate the problem. Governments
sometimes step in to call a "bank holiday" until the panic subsides.

The situation, down to the main class of assets held (real estate) and the
liquidity promised to creditors, seems to be pretty much exactly the same as
at the retail level. That being the case, this seems to be the prudent move.

~~~
gozur88
>This seems to me very analogous to preventing a run on banks. Traditionally
retail banks would invest their depositors' savings in real estate by
financing mortgages. Indeed - in England many banks are still called "building
societies".

That's not really how banking works in a fractional reserve system. The money
banks lend to borrowers is created as part of the loan transaction, and in
theory the bank retains enough money to pay off all depositors in the event of
a bank run.

~~~
tvladeck
You're confusing different definitions of the "money".

In theory, they retain enough _assets_ to pay off their creditors, but not
enough _cash_. In the event of a bank run they'd have to be handing over their
stake in mortgages and other debt that hasn't yet been paid off. But of course
these are illiquid, and the creditors wouldn't accept that in general.

In the vocabulary of money supply, you're confusing M0 and M1.

~~~
gozur88
The M0/M1 distinction is irrelevant - banks buy cash from and sell cash to the
central bank all the time based on how much they need. Banks borrow against
assets all the time, and during a run that's what they'd do.

"Illiquid" is just a word for little people as long as the bank is solvent.

------
the_watcher
Correct me if I am wrong, but isn't the "extreme circumstances" clause the
same one used by Michael Burry prior to the 2008 crash (detailed in The Big
Short)?

I don't think it's only British funds with this kind of language. It seems
like standard boilerplate a lawyer would insert into the documents as a catch-
all for anything unexpected (and misuse of it would be addressed with
litigation)

~~~
cesarb
> I don't think it's only British funds with this kind of language. It seems
> like standard boilerplate a lawyer would insert into the documents as a
> catch-all for anything unexpected (and misuse of it would be addressed with
> litigation)

Yes, this kind of clause can be found elsewhere. The ones I'm most familiar
with are Brazilian funds, and randomly picking one from a major bank, the rest
of the rule for it is: if the fund stays closed for more than 5 days, the
manager has 15 days to do a vote among the holders, which can then replace the
manager, reopen the fund, keep it closed, pay in assets instead of cash, split
the fund, or even liquidate it. So any misuse of this clause would probably
lead at least to the manager losing control over the fund.

------
ChuckMcM
Locking the doors is always a risky proposition. On the one hand it avoids
fire sales, on the other it makes other investors nervous. Great scene in "its
a wonderful life" when their was a run on the Bailey Building and Loan where
George Bailey (James Stewart) explains the "60 days" rule. And the people who
"sold their shares" for 50 cents on the dollar to the evil banker across the
street.

~~~
taneq
I was thinking of the scene in Mary Poppins regarding the tuppence:
[https://youtu.be/lfP8__wl-_4](https://youtu.be/lfP8__wl-_4)

------
bubbleRefuge
“At some point you have to wonder what happens if all these investors decide
to go home.”

Asset prices decline. Interest rates become attractive. New investors come in.
Money under the mattress doesn't give much of a return.

~~~
branchless
And people in the UK get to have a reason to work again as land prices fall
back in line with local wages.

Hooray. Speculators: go home. Of course we still need to put our parasitic
banking industry into line but it's a start.

~~~
justin66
> Speculators: go home.

I imagine they know how to go short as well as long.

~~~
branchless
Really? I think most land speculators are pretty unsophisticated. How are they
going to go short? Short UK house builders? Already dropped. Hedge GBP?
Already dropped. Most are holding the baby now.

------
retrogradeorbit
A bit of light relief on this subject from South Park:

[https://www.youtube.com/watch?v=-DT7bX-B1Mg](https://www.youtube.com/watch?v=-DT7bX-B1Mg)

------
socialist_coder
The Brexit will never happen, for 2 reasons.

1) The EU is not allowing the UK any unofficial negotiations, so they have no
idea how any of these economic negotiations will go. The UK government is
scared to pull the trigger and no one in power wants to be the one to do it.

2) The UK needs free trade with the EU. If they want free trade, they also
have to agree to free movement of labor. Stopping free movement of the labor
was one of the core reasons the Brexit passed.

~~~
Houshalter
But if they don't go through with it, the voters will be pissed that they are
breaking promises and anti democratic, etc, and vote them out. It's my
understanding that conservatives are over represented in Parliament in the UK.

You can have free trade without limitless immigration. Many countries do. I
don't know where you get that idea.

~~~
yongjik
I'm sure UK can have free trade with Japan without any immigration. Good luck
arranging that (free trade w/o immigration) with the rest of EU.

~~~
Houshalter
I believe the EU has free trade deals with Australia and Canada, without
unrestricted immigration. Those are both former UK colonies that are similar
to the UK. I'm not sure why you believe the EU is anti-trade. In fact
promoting free trade seems to be it's main purpose.

~~~
yongjik
Label it whatever you want, but I believe the EU is anti-(trade with UK
without freedom of movement) because they publicly said so.

[http://www.bbc.com/news/world-europe-36659900](http://www.bbc.com/news/world-
europe-36659900)

> "Any agreement, which will be concluded with the UK as a third country, will
> have to be based on a balance of rights and obligations. Access to the
> single market requires acceptance of all four freedoms."

Are you saying that they're bluffing? (Well, that's possible, I guess.)

~~~
Houshalter
Well a single EU leader said that, I don't know if the opinion is unanimous.

Regardless, I suspect they won't do it because it would be irrational. Of
course they have every incentive to make threats. But actually going through
with them would hurt them just as much as the UK. Trade is a mutual benefit
after all.

Anyway it just strikes me as mean-spirited. I doubt the EU leaders really care
about immigration that strongly. They are also holding the UK to a different
standard than other non-EU countries, and there is no justification for that.

I'll believe their serious if they start demanding the US, Australia, etc,
open their borders or lose trade. Good luck with that. Yet somehow they find
it weird the UK doesn't want unrestricted immigration.

~~~
mryan
> Anyway it just strikes me as mean-spirited. I doubt the EU leaders really
> care about immigration that strongly.

Freedom of movement of trade, people/labour, capital and services is the core
founding principle of the EU - they care about it a lot.

> Regardless, I suspect they won't do it because it would be irrational.

If Britain is given a deal that allows them all of the benefits of EU
membership without any of the perceived downsides, all other EU member states
will want this better deal too. Giving the UK such a deal would cause a number
of additional countries to leave the EU. Thus, it would be irrational for the
EU to give the UK a deal which would lead to the eventual breakup of the EU.

> I believe the EU has free trade deals with Australia and Canada, without
> unrestricted immigration.

There are essentially three ways to trade with the EU: As a member state
(Britain's current position, France, Germany, etc.), as a member of the EEA
(Norway), or under WTO rules (Australia).

If the UK wants one of the first two options they will need to allow freedom
of movement. If Australia (somehow) applied for membership of the EU or EEA it
would need to allow freedom of movement for EU citizens.

------
WalterBright
I suspect that what will eventually happen with Brexit is Britain will
negotiate enough free trade deals that it will remain part of the EU in all
but name.

~~~
discardorama
Problem is: if they want free trade with EU, they must accept free movement of
labor; which was the main underlying problem which caused people to vote for
Brexit. If they adopt free labor movement, the Brexit would have been for
vain, and most Brexit supporters won't go for it.

~~~
brc
You can negotiate plenty of labor movement just with some simple
qualifications, like not having a criminal history, being an eu citizen for 5+
years, no access to welfare for 3 years, things like that. I think most brexit
supporters would go for that. The opposition is not to immigration in general
from what I understand, but to uncontrolled immigration with which the UK
parliament has no control.

Modern visa granting can be done electronically like the U.S. ESTA and could
easily be achieved with little disruption. It could also prove a handy earner
for a small fee.

I think it is misrepresenting the majority of brexit supporters to say they
don't want any immigration. All the ones I talked to just wanted to have a
say, and the EU did not give them that.

------
ape4
Does the fine print say they are allowed to do this?

~~~
JanSolo
The article mentions that the managers are allowed to block withdrawals under
'exceptional circumstances' to protect those with a longer term investment
outlook.

~~~
enjo
The book/movie "The Big Short" dramatizes this really nicely.

~~~
theoh
In that case the fund manager was portrayed as receiving threats of legal
action when he refused to allow people to leave -- there was absolutely no
explanatory context which allowed the audience to decide whether his actions
represented merely a whim of the fund manager or a legally valid option.

Edit: My comment refers to the film.

~~~
tanderson92
That is not true. In fact the book was very clear how this occurred; I would
have to rewatch but I believe the movie also hints at this. I thought the
book's discussion of side pocketing was one of the most revealing parts of
book: Lewis did an excellent job at explaining the recourses available to
money managers.

Here's two short paragraphs from page 145 (of my copy, anyway) of The Big
Short:

=================

> One night, as Burry was complaining to his wife about the complete absence
> of long-term perspective in the financial markets, a thought struck him: His
> agreement with his investors gave him the right to keep their money if he
> had invested it "in securities for which there is no public market or that
> are not freely tradable." It was left to the manager to decide if there was
> a public market for a security. If Michael Burry thought there wasn't--for
> instance, if he thought a market was temporarily not functioning or somehow
> fraudulent--he was permitted to "side-pocket" an investment. That is, he
> could tell his investors that they couldn't have their money back until the
> bet he'd made with it had run its natural course. And so he did what seemed
> to him the only proper and logical thing to do: He side-pocketed his credit
> default swaps. The long list of investors eager to get their money back from
> him--a list that included his founding backer, Gotham Capital--received the
> news from him in a terse letter: He was locking up between 50 and 55 percent
> of their money. Burry followed this letter with his quarterly report, which
> he hoped might make everyone feel a bit better.

...

> Immediately, his partners at Gotham Capital threatened to sue him. They soon
> were joined by others, who began to organize themselves into a legal
> fighting force. What distinguished Gotham was that their leaders flew out
> from New York to San Jose and tried to bully Burry into giving them back the
> $100 million they had invested with him. In January 2006 Gotham's creator,
> Joel Greenblatt, had gone on television to promote a book and, when asked to
> name his favorite "value investors," had extolled the virtues of a rare
> talent named Mike Burry. Ten months later he traveled three thousand miles
> with his partner, John Petry, to tell Mike Burry he was a liar and to
> pressure him into abandoning the bet Burry viewed as the single shrewdest of
> his career. "If there was one moment I might have caved, that was it," said
> Burry. "Joel was like a godfather to me -a partner in my firm, the guy that
> 'discovered' me and backed me before anyone outside my family did. I
> respected him and looked up to him." Now, as Greenblatt told him no judge in
> any court of law would side with his decision to side pocket what was
> clearly a tradable security, whatever feelings Mike Burry had for him
> vanished. When Greenblatt asked to see a list of the subprime mortgage bonds
> Burry had bet against, Burry refused. From Greenblatt's point of view, he
> had given this guy $100 million and the guy was not only refusing to give it
> back but to even talk to him. And Greenblatt had a point. It was wildly
> unconventional to side-pocket an investment for which there was obviously a
> market. There was clearly some low price at which Michael Burry might bail
> out of his bet against the subprime mortgage bond market. To some meaningful
> number of his investors, it looked as if Burry simply did not want to accept
> the judgment of the marketplace: He'd made a bad bet and was failing to
> accept his loss. But to Burry, the judgment of the marketplace was
> fraudulent, and Joel Greenblatt didn't know what he was talking about. "It
> became clear to me that they still didn't understand the [credit default
> swap] positions," he said.

~~~
theoh
I've edited my comment to make it clear that by "The Big Short" I had
understood that we were discussing the movie of that name.

It's probably safe to say that the editors/director of the movie knew what
they were doing when they omitted any explanation of the possible side-pocket
situation. The overall impression given is in keeping with the passages you've
quoted.

~~~
tanderson92
No, the movie also includes it (though the specific words "side pocket" are
not mentioned, it is clear that it was a legal option available to the fund
manager). It's directly in the text of the e-mail that Burry types out to his
investors. From the screenplay text[1]:

> Mike types an email. He is alone in the office with empty desks outside.

> "As you may know, our agreement allows me to take extraordinary measures
> when markets aren't functioning properly. I currently have reason to believe
> the mortgage bond market is fraudulent. So in order to protect investors
> from this fraudulent market I've decided to restrict investors’ withdrawals
> until further notice. Sincerely. Dr. Michael Burry."

> Mike breathes deep, and hits SEND.

[1]: [http://www.paramountguilds.com/pdf/the-big-
short.pdf](http://www.paramountguilds.com/pdf/the-big-short.pdf)

------
vocatus_gate
Not to be the token cryptocurrency shill in the thread, but Bitcoin and its
derivatives are very useful in situations like this. It's impossible to stop
or otherwise block Bitcoin transfers, so it enables, for better or worse,
unrestricted capital movement.

~~~
united893
Not true. These are hedge funds managing complex instruments, not just regular
bank accounts. Your bitcoin wallet doesn't allow shorting for example.

Equivalent instruments built on blockchain technology would suffer from
similar issues.

~~~
drcross
>These are hedge funds managing complex instruments.

How come it's only when it comes to matters of finance that people tell me
things are too complex for me to understand, yet I am well capable of
understanding the most convoluted of machinery and systems. My only conclusion
is that they are needlessly complicated on purpose.

~~~
tedunangst
It's not particularly complicated. But if you invest in a real estate fund and
want your money back, you can't walk into some random office and take "your"
chair. If you invest in a gold mine, you can't go grab "your" shovel. Your
interest is diffuse.

