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Money managers under the microscope

from Global Investing:

Hobson’s choice

Imagine you're an institutional investor holding a great deal more illiquid, price-impaired assets than you're comfortable with. Do you a) hold on to them and pray that the price rebounds, or b) sell now and take a loss, before things get even worse?

This is the dilemma facing institutional investors who went just that little bit too far out along the risk curve in search of extra yield. According to Tom Graf, who heads BNY Mellon's global workout solutions business, clients have to-date largely preferred to wait for markets to rebound, and in some cases this could well make sense.

The workout unit seeks to establish an intrinsic fair value for those assets that have lost their lustre since the sub-prime implosion in 2007. Graf says the illiquid assets most commonly found in institutional portfolios are non-agency "Alt-A" mortgages, which sold like hot cakes during the US property boom. Non-agency means anything not secured through friendly government-backed Fannie Mae and Freddie Mac, whilst Alt-A mortgages require less documentation than traditional loans, allowing borrowers to inflate their income and assets.

If the loan originated before 2005, Graf says it may still have enjoyed significant appreciation, so he would recommend that clients sell. "But if the loans are of a later vintage they might be trading so distressed that we would advise clients to hold on, in the hope that they come back."

The attraction of the toxic


Nothing like a bit of toxicity. Wealth managers at Citi are telling their clients to watch for a burst of hedge fund interest in bad assets. They reckon the biggest opportunity for hedge funds is probably around the Public-Private Investment Fund, which is part of the huge U.S. plan to stabilise the toxic1financial sector.

The idea is that the U.S. government will lend money to investors to buy up toxic assets from banks, thus setting a market price. But the notes are non-recourse ones, which means that any default is limited to the actual cost of whatever collateral is require. In short, it limits liability if asset prices fall.