Stone Lion’s fund freeze follows several others in the high yield space that our firm is tracking including the Third Avenue Focused Credit Fund and Claren Road Asset Management LLC. The recent closures are nearly unprecedented in the hedge-fund industry since the end of the financial crisis and shows the difficulty facing traders looking to sell risky and hard to value positions.
Stone Lion’s hedge funds are down about 7% through the end of July. At that time the fund cut off prospective investors from receiving updates. Since that time the funds have continued to suffer significant losses and documents examined by the Wall Street Journal indicate the funds manage 24% less now than from July 2015.
According to news sources, high yield and distressed debt hedge-funds and mutual funds are suffering severe losses and asset freezes due to changes in regulations under the Volcker rule, a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act which has made holding high yield debt inventory more expensive for banks and brokerage firms.
Because regulators demand more capital for holding risky assets, when funds try to sell bad positions it can be harder to find buyers for the securities in those portfolios. The issue has become exacerbated in certain beat down sectors including energy. Because there are fewer buyers it is difficult to determine what the value of the security is. Because the regulations were not in effect during the 2008 financial crisis the effects of the rule have not been tested under distressed market conditions.
Investors who have suffered investment losses may be able recover their losses through arbitration. The investment attorneys at Gana Weinstein LLP are experienced in representing investors in cases of unsuitable recommendations and other breaches of brokerage firm’s obligations to the customers. Our consultations are free of charge and the firm is only compensated if you recover.