Investors have pulled around €1bn out of poorly-performing H2O Asset Management funds this year, but the firm still believes some of its bets that soured during the pandemic will come good.
The London-based firm, once seen as a star of the European investment industry, told investors of the redemptions in June as part of a client presentation, a copy of which was reviewed by the Financial Times.
The withdrawals, coupled with losses of investments, have knocked assets at the subsidiary of French bank Natixis from more than €30bn at the end of last year to €22bn, making it one of the region’s biggest fund casualties from the crisis. H2O declined to comment.
In March the asset manager, which was founded by former Crédit Agricole traders Bruno Crastes and Vincent Chailley, warned clients of “surprisingly large losses”. A number of its funds are still down more than 30 per cent in 2020. The hardest hit, a global macro fund named Vivace, had dropped more than 60 per cent as of late June.
Among the trades that went wrong for H2O during the choppy markets of March were bets on Italian bonds, which sank as Rome grappled with a surge in coronavirus cases. The firm also lost money on bets against US Treasuries, which rallied strongly as investors sought a haven and as the US Federal Reserve slashed interest rates to try to cushion the economy from the effects of the pandemic.
However, H2O has been continuing to bet against Treasuries, according to the investor presentation, and believes prices could fall — pushing borrowing costs higher — quicker than the market expects.
Investors “expect zero-rates until well into 2023”, H2O said in the presentation. “But data will ultimately force [the Fed] to reverse with little warning . . . Stay short 5-7 year maturities in the US, Germany and the UK.”
The firm also continues to back Italian bonds, where it said a recovery has helped drive returns since mid-March.
But the firm has switched from a positive bet on the US dollar and is now eyeing gains in emerging market currencies because of the Fed’s loose monetary policy and an expected recovery in the global economy.
News of the redemptions comes at a difficult time for H2O. On Tuesday, the FT reported that the UK’s Financial Conduct Authority is probing the firm’s sale of illiquid bonds and stocks to Lars Windhorst, the controversial German financier. Last summer a separate FT investigation revealed that H2O’s open-ended funds held more than €1bn of hard-to-sell bonds linked to Mr Windhorst, who has a history of legal troubles. The firm suffered more than €8bn in investor redemptions in the weeks that followed.
Additional reporting by Robert Smith
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