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 Both China and Greece have taken steps in the last month to curb
sell-offs in their stock markets by imposing trading restrictions.
Hedge funds exposed to the two markets are now finding it tough to
value their holdings.
At least two hedge funds - APS Greater China Long/Short and Horizon
Growth Fund - have told investors that they can no longer withdraw
their capital. The APS fund is exposed to China and Horizon Growth
is exposed to Greece.
Hedge funds fear that geopolitical flux might prompt some investors
to pull their money out, leaving the remaining investors stuck with
holdings that are hard to sell, should Greek and Chinese stocks
remain inaccessible for long.
The move is a stark reminder of similar actions during the 2008
crisis, which led some hedge funds to create "side pockets" or mini
suspended funds in which to park illiquid assets.
Investors are restricted from exiting them, making side pockets
unpopular. Meanwhile, funds could calculate a separate net asset
value (NAV) for assets that can be valued, allowing them to accept
fresh subscription or redemption requests.
"That's how hedge funds have dealt with these types of situations in
the past," said Ryan McNelley, managing director at Duff & Phelps
that advises fund firms on asset valuation.
"A side pocket where they don't get fees based on valuation is one
potential way to isolate the problem," he added.
The Greek market has been shut since June 29. In China, meanwhile,
1,300 stocks had announced trading halts last week, making roughly
$2.4 trillion worth of stock market assets inaccessible to
investors.
The two countries pose different risks. While Greece is a tiny
market - research firm eVestment estimates institutional investors
have just $1.7 billion invested in Greek stocks - no one knows when
its market will reopen.
In China, most trading suspensions are not expected to last long,
but the sheer size of the market means liquidity problems could pile
up for funds with exposure.
Potential foreign participation in the mainland stock market through
two government programs that give direct investment quotas to
foreign firms totaled $139 billion as of June 29. A third avenue was
launched last year to trade China shares through a Hong Kong office,
totaling up to 300 billion yuan ($48.32 billion), although it is not
yet utilized fully.
VALUATION
Trading suspensions are a problem for funds that are required to
accurately value their portfolios, which means if they last too
long, the fund is forced to put in place contingency measures.
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Side-pockets are generally put in place only when funds face heavy
redemptions, which investors say is not the case at this time with
prominent U.S. funds that are invested in Greece.
However, smaller funds whose bets in Greece form a relatively larger
part of their total overall exposure, may be considering such moves,
investors said.
"June NAVs are usually done by the end of July. If by that time
Greece is not open, people will have to write down Greece exposure
or do side pockets, especially funds with more than 2-3 percent
exposure," a London-based hedge fund investor said.
Funds resorted to creating side pockets in 2008 as buyers for many
assets disappeared and investors wanted money back.
Assets worth up to $400 billion were parked in side pockets, gated
or restructured during the crisis globally, according to Hedgebay, a
secondary market for hedge fund stakes.
"To justify side pockets you really need close to zero liquidity in
the assets, and of course there are investments which have done 'a
2008' and for which there is practically no market to mark against,"
Savvas Savouri, chief economist at London-based hedge fund Toscafund
told Reuters.
"And as we saw in the period post 2007, investors can be nasty
litigators and unforgiving for the future," he added.
($1 = 6.2081 Chinese yuan renminbi)
(Additional reporting by Sinead Cruise in LONDON and Svea
Herbst-Bayliss in BOSTON; Editing by Simon Jessop and Peter Graff)
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