Credit Hedge Funds Can’t Figure Out What They’re Worth

Net asset value — a key metric — isn’t getting reported by many funds.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Net asset values — a fundamental measure of how much funds are worth, similar to a corporation’s market capitalization — are missing for a big portion of credit hedge funds, especially those that invest in structured products like mortgage-backed securities.

About half of credit fund managers have provided performance information for March to research and data firm PivotalPath, according to Jon Caplis, CEO. Normally, about 70 to 80 percent of these managers would have fully reported information by this time.

Funds focused on structured credit and mortgage-backed securities show the biggest problems, with only about one-third having calculated a net asset value and provided the information to PivotalPath, which includes about 2,000 funds, 40 strategies, and covers about $2.3 trillion in hedge fund assets.

The bond market machine, which evolved over decades, was once powered by big dealers and investment banks. Global regulators crippled it when they imposed new rules, such as increased capital requirements and an end to proprietary trading, to prevent a repeat of the financial crisis. Critics have long said trading would break down once the new ecosystem got its first prolonged test. The market downturn that began in March has wreaked havoc on fixed income markets so far.

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With few transactions happening on the really illiquid side, funds with illiquid positions in their books had little transparency into “real” pricing for those positions, especialy until the Fed came in in late March. “If there are no recent transactions and literally no bids, what is mark-to-market value then?” said a credit markets source.

The PivotalPath credit fund index is down 8.9 percent for March. Sub-strategies such as relative value fared best, losing 1.7 percent, while funds focused on structured credit and mortgage-backed securities came last at negative 15 percent.

But the credit index can only reflect funds that have reported. Caplis said final results in structured and MBS are likely to be worse than they already are, further driving down the overall index.

Caplis added that dispersion is extremely high across all credit strategies, with returns ranging from negative 88 percent in to 28.75 percent. Some of the largest problems have to do with credit lines being pulled, requiring funds to sell assets regardless of their fundamental view and liquidity in the primary market, he explained.