Damage limitation is the flavor of the day over at Switzerland's GAM. Question however is whether the potential closure of the flagship fund isn’t simply the beginning of the end.
GAM seems to have lost all credibility. After the suspension of Tim Haywood, investment director for the absolute return strategy, investors have started pulling out their funds big way. The Swiss asset manager may now be forced to close funds with assets worth as much as 7.3 billion Swiss francs ($7.3 billion).
CEO Alexander Friedman and his executive committee is trying to apply the brakes to stop the rot. The closure of the funds would amount to a radical solution in a business that allows for no mistakes, because the institutional clients can’t explain away a loss of performance or worse.
As a hedge fund provider, GAM is playing in the big league of institutional clients. Their rules and checks are ultra tight and force them to pull the plug as soon as there is the slightest of upset at an asset manager.
Triple A Firms Only
The investors have responded to the pressure by choosing Triple-A-providers only. In reality, this means that the funds' investment and risk management, the fund administration and accountancy conform to the highest of standards. Otherwise, the fund provider won’t receive a penny to manage or risks losing the assets it has already under management.
The irregularity that led to the suspension of Haywood is a good example in case. With the potential closure of the funds, GAM tries to prevent a spill over, prompting clients to withdraw assets from other, unrelated strategies and funds. Something the company says hasn’t occurred yet. The other investment teams and third-party managers are doing their job as usual.
Stock Nosedive
The stock exchange has been less forgiving: the GAM stock dropped more than 15 percent in early morning trading, extending the loss of more than a fifth on Tuesday (the Swiss market was closed Wednesday due to the national holiday).
GAM is in trouble. The outlook the company provided for the second half of the year revealed that the funds don’t perform as well as they should. A third of its assets under management have such a bad return that GAM can’t claim a performance fee.
An active asset manager that doesn’t perform is rendering itself obsolete – to put it bluntly. CEO Friedman, who says to be in close contact with his fund managers, hasn’t succeeded in turning things around. The number of strategies and funds that don’t yield performance fees has increased by about a fourth compared with last year.
A Luckless CEO
Saying, as Friedman did, that the market condition that caused the problems will likely endure, portrays a degree of resignation. The consequence of this may be that more clients pull out their funds.
Anything that GAM could do to stop the rot? The calls for the CEO to resign are a dead cert. He has been luckless in his time as boss, having to master his fourth major crisis in as many years.
First he had to stop an asset drain, then, in 2016, the underperforming funds resulted in a drop of profit, and the takeover of Cantab, an algorithm trader, was vastly overpaid. Last but not least, the investment manager of the flagship business didn’t do his job properly, as was revealed this week.
Transparency a Must
Whether CEO Friedman will succeed to turn the corner and break out of the vicious circle of bad performance and outflow of assets is yet to be seen. In the context of the Haywood suspension it looks a little uncertain.
Shedding some more light on the Haywood misdemeanors would help. Clients who don’t get told in detail what had happened will have lost the rest of what was left of their trust. And that’s when all the rest of the lights will go out out.
