Several bond funds with only marginal exposures to US sub-prime mortgages through asset-backed securities have run into difficulty, as last month’s credit crunch takes hold, Financial News reports.
A 750 million ($1 billion) US bond fund managed by Axa Investment Managers reported a 13 percent drop in its value over two days in July. The performance of a $1.3 billion (950 million) fund, run by William Irving at Fidelity Investments in the US, has hit a brick wall.
These losses pale in comparison to the 50 percent plus losses incurred by hedge funds but these are conservatively managed investment funds that do not use leverage and target returns just over Libor.
Axa took the unusual step of offering to buy out investors at the mid-price to safeguard against being forced to sell its assets at highly discounted prices. It told investors: “The commitment of marketmarkers to provide liquidity in that market is virtually non-existent currently, given the low level of risk-aversion shared by all market participants. They indeed tend to quote all bonds according to the worst possible scenarios.”
Another hedge fund managed by Bear Stearns, with less than 1 percent exposed to shaky sub-prime collateral, also came under pressure and the US bank was forced to suspend investor redemptions.