September 2008 / March 2020: different crisis, different outcomes?
 
The quarter saw the occurence of liquidity events that had rarely been seen since the 2008 crisis: a number of funds put in place higher exit fees, put restrictions on redemptions, froze or delayed liquidity and valuations or were simply put into liquidation.Property and mortgage focused funds were most severely hit followed, to a lesser extend, by credit strategies. 

Somewhat unsurprisingly, the extensive use of derivatives to host complex credit strategies in UCITS formats combined with liquidity drying up in the underlying markets led the UCITS label to not be immune to turmoil as funds like Exane Integrale or LFIS Vision Opportunities limited investors exit possibilities. At the same time, regulators put higher scrutiny on the use of leverage and breaches to UCITS ratios. 

In what is usually considered a highly liquid area, ETFs also showed signs of stress with widening discounts to NAVs, delays in underlying index rebalancing operations, implementation of exit fees or even outright liquidations due to fast drop in value.

In the hedge funds area, the appearance in recent headlines of names like Solus or Southpaw that had already faced very similar liquidity issues in the aftermath of 2008 raise the question of how similar investment strategies managed by the same managers in comparable times of market stress (or dislocation) will lead to different outcomes?

In the coming weeks, we believe fund liquidity will likely continue to be challenged as adverse mark to market, higher LTVs,  forced rebalancings, strategic de-risking constrained by long redemption notices may lead to high levels of redemption requests. Beyond those mechanical deleveraging effects, the news that sovereign wealth funds of Saudia Arabia or Norway will be freeing up large amounts of capital to support their economies impaired by Covid and the collapse of oil prices will likely add to the pressure.

On the front of investment underlyings, damages seemed to have been controlled in derivatives but signs of serious stress were perceivable with news of pricing difficulties due to high uncertainty on forward dividend estimations, lack of liquidity in swap markets, greeks hitting worrying levels at investment banks that have been issuing vast amounts of vega and correlation sensitive structured products over the last decade or tensions on the LIBOR despite massive central bank liquidity. 

Credit remains under pressure with a vast number of pending uncertainties: what will be the efficency of monetary and budgetary support plans ? What is the number of bankrupcies to be expected ? What is the contagion and cross-debt risk in case of a major bankrupcy? How will banks issuing syndicated loans as well as PE and Private Debt funds hold up with their books of acquisitions made at record multiples in companies under their second, third or fouth LBO governed by covlight documentation and unitranche financing, carried out at an average debt to ebitda leverage ratio of 6x (in the US in 2019) heavily relying on revolving facilities in the context of economies heading either towards continued disclocation or government supported recovery ?  

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That said, the colossal amounts of dry powder commited to hedge funds, special siutations fund, distressed, PE and Private Debt funds that have been unable to deploy capital in a satisfactory manner in the recent years for the same reasons as those mentioned above will likely provide support...or rescue at target IRRs that were totally unachievable before the Covid crisis.