"High-Yield Markets Are Not Illiquid" Said Third Avenue Manager

The market was rattled Friday by Third Avenue's announcement they are liquidating their $788M Focused Credit Fund (FCF). FCF was focused on buying dog poop, the market of which is small and bids infrequent. 

Redemptions have been halted and investors are now stuck on what should be a turbulent rollercoaster ride, as they wait for an "orderly" liquidation process.

Just a few years ago, FCF boasted about the advantages of illiquid investments. In a 2012 note titled “Myths in the High-Yield and Leveraged Loan Market," Lead manager Thomas Lapointe explained how the shallowness of junk-bond markets could actually provide an edge for the relatively small fund:

"Myth #6: The High-Yield and Loan Markets Are Illiquid: Low volumes can be really bad news for larger players in the market. However, as price-conscious buyers, we can use lower volumes to our advantage, by demanding better prices from sellers that need a bid."

Unfortunately, Thomas has found himself on the receiving side of his devious plan. His largest individual position is a 5% stake in troubled Clear Channel Communications (now IHeartMedia), which was recently trading at roughly 30 cents on the dollar.

FCF was down 27 percent this year and has rightfully hemorrhaged redemptions, shrinking 75% since July when it had $3.5B in assets. 

50% of investments were in non-rated securities, and 45% in CCC or below rated assets. FCF was a distress-debt hedge fund masquerading as a mutual fund. 

This event is unprecedented and should expedite new liquidity regulations for public funds. Businesses that revolve around managing "3X leveraged bullshit", or distressed/illiquid holdings will feel the burn. 

Developing ideas... stay tuned. 

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CDS on Junk Bonds

$ Flow into High-Yield Funds

High-Yield ETF