H2O Asset Management’s flagship bond funds have lost as much as half their value in a matter of weeks, after the London-based fund manager experienced another day of severe losses on Thursday.
H2O, a subsidiary of French bank Natixis that managed about €30bn of assets at the start of the year, has emerged as one of Europe’s highest-profile victims of the wild market swings. The investment firm on Tuesday sent a letter to clients warning of “surprisingly large” losses because of bad bets on bonds and currencies, before revealing that its flagship Multibonds fund had lost 20 per cent in a day on Monday.
After regaining some of the losses on Wednesday, Multibonds then lost another 20 per cent on Thursday, according to data released over the weekend. The fund, managed by H2O’s chief executive Bruno Crastes, is down 49 per cent from its peak last month.
H2O’s Allegro fund posted a bigger loss — of 25 per cent — on Thursday, taking its drop from its recent peak to more than 50 per cent. Influential rating group Morningstar downgraded Allegro last year, citing H2O’s “loose risk controls”, after the Financial Times detailed the scale of the firm’s illiquid bond holdings linked to financier Lars Windhorst.
Multibonds and Allegro are two of H2O’s flagship funds, on which the firm placed fees for new investors last month after their assets hit €5.5bn and €1.6bn respectively.
H2O declined to comment.
Before their steep drops, H2O’s funds had been some of the best-performing in Europe over the past decade. Investors who placed their money with H2O three years ago are still up nearly 12 per cent in Multibonds and 10 per cent in Allegro even after last week’s losses.
Morningstar warned in 2019 that this performance came at the “cost of higher risk than investors could have expected”, however, pointing to the “extensive use of leverage through derivatives”.
At the height of the fallout arising from H2O’s illiquid debt exposures last summer — when investors pulled €8bn of money from its funds — Mr Crastes vowed to “never” halt redemptions from its funds, which mostly allow investors to withdraw their money on a daily basis.
This prompted Paul Myners, the former City minister, to submit a written question to UK parliament asking the government and the financial regulator if they approved this statement. On Wednesday, Lord Myners asked the government what plans it had to investigate H2O’s “risk control strategies and executive leadership” in light of the heavy losses.
H2O’s troubles this week have fed through to the stock price of its parent company Natixis. It is now the worst-performing major bank in Europe after its shares more than halved over the past month.
Matthew Clark, an equity analyst at Mediobanca, who has an “underperform” rating on the bank’s shares, said that if H2O experiences “material outflows”, it could create issues around the bonds it still owns that are linked to Mr Windhorst. He is well-known in his native Germany for his legal troubles.
“I think the reputational risks of the illiquid Windhorst securities could yet reappear,” Mr Clark said.
H2O’s auditor flagged last month that the firm broke rules governing open-ended funds by engaging in large trades with a small brokerage on these hard-to-sell bonds.
Some of H2O’s smaller funds that can also invest in stocks experienced more severe losses last week. H2O’s Multistrategies fund lost 35 per cent on Thursday, meaning investors have lost about two-thirds of their money this year. The fund has less than €400m in assets, having begun the month with more than €900m.
