The spate of UK property funds forced to suspend redemptions after the Brexit vote should serve as a stark reminder to all investors about the need to have ample liquidity at hand during times of market distress.
In an investor update, Clunie said extreme market events can show how liquidity mismatches can be ‘painfully realised’ over a short period of sharp shocks, as was clearly shown when SLI, M&G, Henderson, Aberdeen and Aviva Investors all imposed gating or shuttering measures.
‘A whole raft of well-known UK commercial property funds have taken the difficult decision to suspend redemptions and/or mark down the value of their assets, as the liquidity expectations of investors in these funds diverge with the reality of the underlying asset class where transactions can take weeks or months to complete.
‘The trigger for the current liquidity malaise in some asset classes has of course been the ‘Brexit’ vote. And while the liquidity crunch in UK commercial property funds is perhaps an extreme after effect of the vote, all asset classes can be subject to liquidity issues at times of market distress.’
Clunie said short sellers, such as himself, need to be aware of the potential to be caught out during times of market stress. ‘This is an area about which we are inherently vigilant, even during seemingly halcyon days.
‘If stock lending by one or more of the large lenders, such as a big index fund manager were stopped for any reason, then short-sellers (who ultimately rely on borrowed stock) might be unable to maintain their positions.
‘In that scenario it might become necessary to cover those positions at whatever price could be found in the market – likely an unattractive one and that would hurt overall returns.’
Clunie has focused many of the active bets in the fund in what he deems large, liquid stocks, such as oil majors BP and Statoil, while shorting industrial giant Caterpillar and food and beverage firm Campbell Soup.
The Jupiter Absolute Return fund returned 9.5% in sterling terms over the three years to the end of May 2016. This compares with an 11.8% return by the average manager in the Alt Ucits – Long/Short Equity sector over the same timeframe.