H2O relied on minor brokerages to shuffle illiquid debt


H2O Asset Administration carried out a whole lot of tens of millions of euros of trades in illiquid bonds within the yr earlier than regulators froze its funds, shuffling its publicity to this troublesome debt by means of a free community of minor brokerages.

The counterparties are uncommon for a €22bn funding agency. They embrace entities with hyperlinks to Lars Windhorst, the controversial German businessman that H2O’s portfolio of hard-to-sell bonds are all tied to. There may be additionally a small lossmaking British service provider financial institution and a mysterious firm, “Benefit Capital”, that H2O refuses to establish.

H2O initiated these trades, often called “purchase and promote again” transactions, within the wake of a Monetary Occasions investigation in June 2019, which revealed that the fund supervisor held greater than €1bn in bonds linked to Mr Windhorst, a flamboyant financier with a historical past of authorized hassle.

The following furore led panicked buyers to yank billions of euros from H2O’s funds, whereas the asset supervisor was pressured to write down down the worth of the troublesome securities by 60 per cent, it mentioned this week.

But H2O was capable of reassure its purchasers concerning the bonds’ liquidity a number of days after the FT’s preliminary report, when it introduced that it had managed to promote a big portion of those sometimes thinly traded securities.

It has now emerged that this sale by no means really closed and the asset supervisor was caught holding bonds many buyers had deemed poisonous. However H2O this month revealed it had discovered an suave resolution: “restructure” the abortive disposal into “purchase and promote again” transactions.

In these kind of trades, asset managers sometimes tackle high-quality and liquid securities, reminiscent of authorities bonds, in trade for offering short-term loans to their authentic proprietor, which buys them again at a later date.

In H2O’s case, getting into into these agreements allowed it to reclassify a number of the troublesome illiquid bonds exterior its predominant portfolio holdings. Crucially, this meant that these securities had been exterior the scope of a 10 per cent cap on unlisted investments that applies to open-ended funds.

Matthew Clark, an analyst at Mediobanca, described this strategy to fund accounting as “artistic”.

But H2O breached different guidelines with these trades. In September 2019, H2O’s Adagio fund breached a danger restrict on trades with a single counterparty stemming from transactions with Shard Capital, a small London brokerage, whose founder James Lewis has had a detailed working relationship with Mr Windhorst for greater than a decade.

Shard Capital declined to touch upon its function in these trades, however beforehand instructed the FT that it acted “below instruction as an execution-only dealer”. The final word counterparty was not made public.

By the top of 2019, H2O’s flagship MultiBonds fund had €680m of “purchase and promote again” transactions excellent, representing 13.5 per cent of its internet belongings. These trades had been break up throughout three monetary establishments — Shard, Benefit Capital and Brandon Hill Capital.

Though its trades with every of the three corporations had been just under a 5 per cent cap on publicity to a single counterparty, H2O nonetheless ended up breaching danger limits, which it mentioned was as a result of Brandon Hill was late settling a commerce.

Brandon Hill, based mostly in London, describes itself as a “pure sources service provider financial institution”. The agency, which has no notable file in bond buying and selling and primarily helps small mining firms elevate fairness funding, made a loss in response to its final printed accounts for 2018 and its auditor flagged potential doubt about its capacity to proceed as a going concern. Brandon Hill maintains a enterprise relationship with Shard Capital, in response to its web site.

Brandon Hill instructed the FT it acted as “an agent solely” in transactions with H2O and “always” inside “regulated permissions” set by the Monetary Conduct Authority.

Bruno Crastes, co-founder of London-based asset supervisor H2O © Wheeler, Alex

Benefit Capital is extra mysterious. MultiBonds’ audited annual accounts seek advice from a Benefit Capital within the UK. But there isn’t a enterprise with that title integrated within the UK, nor does any such firm maintain a licence with the nation’s monetary regulator. 

Folks conversant in buying and selling within the Windhorst-linked bonds mentioned they understood the filings referred to Benefit Capital in Belgium, a small wealth administration agency, whose chairman Henry Gabay is a longtime affiliate of Mr Windhorst.

Mr Gabay was arrested in late June as a part of a German investigation into the “cum-ex” tax arbitration scandal. He was launched on bail and has not been charged with any crime. He instructed the FT that he had supplied his “full help” to the German authorities of their inquiries and reiterated that he had “no function in any tax fraud or any dividend arbitrage buying and selling”. 

Mr Gabay’s Duet Group acquired the then-struggling Benefit Capital in 2018 from a gaggle of shareholders together with Jan Tops, a former Olympic gold medal successful equestrian, whose showjumping enterprise Mr Windhorst just lately invested in. 

Funds managed by each Benefit and Duet have additionally beforehand invested in bonds or shares associated to the German financier.

However Mr Gabay denied Benefit was concerned with the trades. “Benefit Capital integrated in Belgium has not traded with H2O,” the Swiss-Turkish financier instructed the Monetary Occasions, when requested about these fund filings.

On his relationship with Mr Windhorst, Mr Gabay mentioned that his Duet Group has executed enterprise with greater than 1,000 entities. “I’ve been in finance since 1992 and do have a really giant community,” he added.

H2O Asset Administration didn’t reply to repeated requests for clarification on the counterparty’s identification.

Accounts for H2O’s MultiBonds fund present that billions of euros price of Windhorst-related bonds flowed out and in of the fund over the course of 2019. 4 of the highest 10 portfolio actions had been in securities linked to the German financier — accounting for about €2.9bn price of each purchases and gross sales.

“Buying and selling of Lars Windhorst-related non-public securities accounted for simply 5.four per cent of H2O MultiBonds’ complete transaction quantity in 2019,” H2O mentioned.

The fund supervisor added that every one of its counterparties are “vetted and preapproved by H2O’s compliance, danger and dealer choice departments”. “H2O has acted consistent with all guidelines and regulatory necessities regarding counterparties,” the funding agency mentioned. 

A spokesperson for Lars Windhorst mentioned: “We’re not conscious of those transactions and they aren’t our concern.”

Mr Clark, the Mediobanca analyst, mentioned: “I concern the seriousness of the deficiencies being revealed at H2O are nonetheless under-appreciated.”



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