Manny Friedman Suspends Redemptions In Credit Fund Citing Frozen, ‘Nonfunctioning’ Markets

Investors in Manny Friedman’s $2.5 billion Debt Opportunities Fund won’t be able to avail themselves of the “opportunity” to withdraw their money for the foreseeable future.

That’s according to a letter seen and cited by the Wall Street Journal.

“We are currently experiencing unprecedented volatility and dysfunction in the credit markets”, Friedman and co-Chief Executive Neal Wilson, told investors. “Market participants fear extreme and irreversible damage as the uncertainty emanating from the coronavirus spreads”.

This is a structured credit fund, so you can only imagine how illiquid some of the underlying assets must be in the current environment. Friedman called the market “nonfunctioning” in the letter, and vowed to protect the fund’s investors by not selling into it.

Apparently, requests only total 6% of AUM, but nevertheless, redemptions are suspended indefinitely. The decision will be reevaluated on a quarterly basis, but investors aren’t likely to be able to redeem until at least Q3. In other words, due to the advance notice the fund asks of clients, June redemptions may be off the table.

Although the Fed has unveiled an alphabet soup of facilities aimed at unfreezing credit markets (including a facility that lets primary dealers pledge a hodgepodge of assets, including various ABS, as collateral), things aren’t likely to thaw anytime soon.

Indeed, it would be entirely reasonable to suggest that the market for structured credit will be among the last to return to normalcy, depending, of course, on what’s in the underlying asset pools.

With economies across the globe effectively shuttered and US job losses logging dubious records unseen in modernity, the cash flows for ABS backed by things like credit card receivables, auto loans and mortgages are probably in serious jeopardy. Indeed, it’s not even clear how many folks are going to pay the rent in the near-term with the US services sector powering down.

If you’re wondering whether the Debt Opportunities Fund has been hit with margin calls, the answer is yes – and “unprecedented” margin calls, at that, according to the Journal‘s account, which notes that the fund “holds mainly debt issued by banks and insurance companies and structured-credit securities collateralized by debt issued by banks and insurance companies”.

So far, the fund hasn’t resorted to any firesales, and suspending redemptions is just an effort to avoid that scenario.

As the Journal goes on to say, in something of an amusing understatement, “hedge funds rarely suspend investor redemptions because it is unpopular with clients”.

In the case of Friedman’s Debt Opportunities Fund, one of those clients is Anthony Scaramucci’s SkyBridge Capital.

Sorry, “Mooch”.