The H2O problem

The last week or so has seen some disturbing developments at one fund management group and of course it comes hot on the heels of the problems of Woodford Funds that I looked at on the 7th of this month. There are some familiar features and themes in the two stories as we wonder if the synchronised timing is no coincidence. So let us take a look at the FT Alphaville article which opened the batting on this subject a week ago.

Proclaimed a “bond maven” by the Wall Street Journal, Bruno Crastes is the chief executive of H2O Asset Management — the firm he established at the start of the decade with backing from Natixis.

The Frenchman has been known to wholeheartedly embrace risk hoping to reap rewards in the longer term, with Mr Crastes perhaps most famous for his big bets on Greek bonds at the height of the eurozone sovereign debt crisis.

Being lauded as a “bond maven” by the WSJ, puts us on alert immediately. It is not quite as bad as being lauded as young business(wo)man of the year but still worrying enough. Then in an era where we often find it is the perceived safe havens are doing well someone who wholeheartedly embraces risk seems out of phase with the times.

There were also two other warning signs.

H2O has rapidly grown in the past six years: from managing €3bn in 2013, its assets under management have increased ten-fold to €30bn. It’s not hard to see why either, given that some of H2O’s funds were among Europe’s best-performing alternative funds last year. One strategy returned an impressive net 32.9 per cent.

If we start with the second sentence then there is a view that best-performers in finance should always be investigated because of the likelihood that this was caused by something outside the rules. After all 32.9% in these times of low interest-rates and yields?

The next point can swing both ways because who wants to broadcast a competitive advantage to the world rather than take advantage of it?

Mr Crastes has been reluctant to go into the specifics of how H2O has been able to beat the market so handily.

The Specific Problem

The mismatch below makes the funds look like a bank which is hardly reassuring as it does not have a central bank standing behind it.

Given that the bonds backing Mr Windhorst’s companies are highly illiquid, and H2O’s funds allow retail investors to withdraw their money on a daily basis, the apparent scale of these investments is significant.

Adding to the issue is the track record of Mr.Windhorst involving two company collapses and personal bankruptcy. But this was apparently no deterrent.

Using this methodology, H2O appears to hold more than €1.4bn in bonds issued by financial vehicles linked to Mr Windhorst across the six funds. They each hold exposures of between 5.5 per cent (Adagio) to 13.7 per cent (Multibonds) in Windhorst-related bonds.

The data suggest H2O is by far the biggest holder of many of Lars Windhorst’s bonds, often holding the majority of the outstanding amount across the firm and even individual funds holding up to 22 per cent of specific securities.

This was particularly pronounced here.

A bond issue from Chain Finance, a vehicle that Mr Windhorst used in 2017 to settle outstanding lawsuits and repay existing debts, proved a particularly popular investment for H2O. All six funds poured money into it, together they hold a combined €383m of the €500m bond — nearly 77 per cent.

H2O admit that this investment is illiquid and marked it down by 24% but there is more. The fund has been very keen on further investments in bonds issued by Mr.Windhorst.

And there are signs that newly minted bonds linked to the former “wunderkind” are now flowing into H2O’s portfolios.

Mr Windhorst appears to have been busily issuing new bonds in the past few months. There is, for instance, Netherlands-registered Trent Petroleum Finance, which issued a €850m bond in December last year…….In the past six months, Trent Petroleum, Rubin Robotics, Tennor Finance and Everest Medtech have issued a total of €2.75bn in bonds at yields between 5 and 8 per cent. And they are starting to appear in H2O’s filings.

As you can see we are continuing down the illiquidity route and seemingly making a virtue of it as we mull whether it has already become a trap where the fear is that it will all collapse if the music stops? This brings us back to the Woodfood Funds saga although this time around the investments are in bonds rather than equities.

I guess you are already on the case as to what happens next…..

Slip-Sliding Away

On Friday it seemed there was a case of trying to close the stable door after the horse had bolted. From Reuters.

London-based H2O, a key contributor of profits at Natixis Investment Managers, was put in the spotlight on Thursday when Morningstar flagged its review, citing questions over liquidity and governance at the H2O fund.

After all as a reply to the Alphaville article from FuturesRodney pointed out the situation had previously looked rather different.

Given the 5-Star fund rating from Morningstar, Trustnet and others, you have to wonder about the degree of analysis and true due diligence which these organisations apply?

Meanwhile according to Reuters the situation was indeed slip-sliding away.

Natixis said in a statement on Friday that H2O, which managed $32.5 billion in assets at the end of 2018, had seen outflows of 600 million euros (535.64 million pounds) between the start of the second quarter and June 20.

How much of that was after the Alphaville article?

Moving to yesterday we saw clear signs of trouble,trouble,trouble.

Around 1.4 billion euros (1.2 billion pounds) was pulled from H2O funds last week after rating company Morningstar put one of its funds under review, citing concerns over liquidity and governance. That sent Natixis shares tumbling. ( Reuters)

That makes me wonder how much was withdrawn on Friday and Monday as well? As for these purposes Friday was not part of last week.These situations can be like a dam bursting as so many try to escape through what is a small door at the same time. There has been a response.

H2O, which manages around 31 billion euros ($35 billion), said it had sold part of its non-rated private bonds. It did not give details, but said the aggregate value of the bonds represents less than 500 million euros as of Monday. (Reuters)

To whom and for how much are the obvious questions?

Anyway the dam analogy is in play as Robert Smith of the FT points out.

New data from H2O out: shows the assets across the six funds we flagged as having exposure to Lars Windhorst dropped €1.2bn on Friday; takes the total fall to more than €2.6bn


Also I doubt many of you will be surprised by this.

In a bid to stem investor outflows, H2O has also introduced “swing pricing”, imposing discounts on investors that want money back


This sort of crisis has happened before as there are echoes of the 1990s here as outperformance is followed be a reverse ( Long-Term Capital Management) and entry doors prove much larger than the exit one ( Milan Stock Exchange). But to my mind it is not a coincidence that we are seeing such problems.This is being driven by the developments below.

Bonds are winning, according to BofAML. Over the past 12 months:

– U.S. Treasuries outperformed the S&P 500 by 140 bps

– European bonds outperformed Eurostoxx 50 by 660 bps – JGBs outperformed Nikkei 225 by 840 bps

– EM sovereign bonds outperformed EM equities by 1250 bps ( @tracyalloway )

If we add in her calculation that there have been 715 interest-rate cuts in the credit crunch era we are left with the point that likely returns are dwindling. Also we return to the point I made earlier about safe havens and risk. No wonder some funds are heading for areas which are illiquid as they chase higher returns. But the catch comes to the issue of what is a fair price for these assets? The truth is that it is always opaque until somebody turns on the light and the cockroaches scatter.

The road gets darker as we note that the QE era has made this worse as it has made markets less liquid.In a explicit sense we see this with Japanese Government Bonds after all the purchases of the Bank of Japan,but it happened with Greek Government Bonds too.As an aside that is why I have a wry smile when Greek Government Bond yields are quoted.But there have been implicit effects too as many will not trade in German Government Bonds now due to this.


Also I think that we need to look at the roles of regulators such as the UK Financial Conduct Authority which has 2 problems on its books this month alone. To,my mind it needs to decide whether it has a basic role with investors needing mostly to observe a form of “caveat emptor” or whether its role is much wider than that? The latter role seems doomed to failure.

Finally are there wider fears or are the rallies in Gold ( US $1433) and Bitcoin ( US $11,398) just a coincidence?




Bitcoin futures trading indicates plenty of problems ahead

Last night saw a change in the Bitcoin world. This is because a Bitcoin futures contract started trading on the Chicago Board Options Exchange or CBOE. It would appear that plenty were watching as this took all of 30 minutes.

Due to heavy traffic on our website, visitors to may find that it is performing slower than usual and may at times be temporarily unavailable. All trading systems are operating normally.

The system trouble was accompanied by yet another surge in the price. From Bloomberg.

Bitcoin futures expiring in January were priced at $17,780 as of 12:57 p.m. Hong Kong time, up from an opening level of $15,000. About 2,300 contracts changed hands.

So not an enormous amount of contracts but the interest and price swings did have an impact.

Futures on the world’s most popular cryptocurrency surged as much as 25 percent during their debut session on Cboe Global Markets Inc.’s exchange, triggering two temporary trading halts meant to cool volatility. Dealers said initial volumes exceeded expectations, while traffic on Cboe’s website was so strong that it caused delays and outages. The exchange said all its trading systems were normal.

Who could possibly have forecast that lots of people would be watching? Anyway as I type this the price for the January 2018 contract is US $17640 ( up 14%)  with the volume being 2695 and the high having been US $18850.

What is the point of a futures contract?

The purpose of a futures contract is to bring trading on a particular instrument into one place. Why? Well even what are considered to be active markets may have bursts of activity followed by quiet periods which are awkward to say the least if you wish to trade in them. The impact can be boosted by the contract covering a concept rather than a particular asset as for example in bond futures where a generic is traded rather than an individual bond. So the ultimate end product of a successful futures contract is liquidity or the ability to trade consistently which benefits investors and traders as well as the exchange itself which charges fees on the trades.

It also brings into play the ability to “short” an instrument as you can sell as your opening trade whereas with ordinary trading you have to buy something before you sell it. This is much simpler than what you have to do in equity markets which is borrowing the stock so you can sell it which you have to plan and work at rather than just contacting an exchange and selling.

Obviously the exchange is at risk as prices move so you have to put up cash or margin to cover your position. When people refer to gearing on a futures contract this is one way of measuring it as if you have to put up 10% margin then if you wished you could buy  ten times as much of the instrument concerned for the same outlay. Some care is needed though as there is also variable daily margin to cover losses ( as well as lower margin if profits arise)

Success or failure comes essentially from volume and liquidity and from that flows the other factors.

How does it work?

The basis is that you have a point in time when everything has to be settled hence the concept of a January contract in the case of Bitcoin ( there are also February and March).  At that point anything outstanding is delivered for example I had a colleague some years back who had 2 potato futures contracts delivered on him and was in danger of getting more spuds than he could handle even with his barn.

Also there is a clearing house who organises and guarantees settlement. In the UK the main clearing banks back the London clearing house which back in my main trading times was seen as a big strength. Well we all make mistakes don’t we? Also the exchange is regulated.

The point for Bitcoin

In a way futures trading is a sort of coming in from the cold for Bitcoin. It gives the potential for there being one price rather than the multitude of them we currently see. That would be a clear gain and if we add in the regulated and clearing issue another potential gain is that institutional investors join the party. This would have positive impacts on volume and liquidity which would be likely to settle the price down and make it more stable.


Something has troubled me from the beginning and it is this. From the CBOE.

XBT futures are cash-settled contracts based on the Gemini’s auction price for bitcoin, denominated in U.S. dollars.

This needs to turn out to be both stable and reliable as for example the market would be damaged if there were even suspicions that there were ways of manipulating the settlement price. I do not know Gemini but their price will have to be 100% reliable and what if the overall Bitcoin price is squeezed?

Next is that one of the benefits of futures trading may not actually apply and h/t to @chigrl for raising the issue. Remember I said that allowing short selling was one of the key points of a futures contract? Well here are the rules of Interactive Brokers and the emphasis is mine.

Due to the extreme volatility of cryptocurrencies, clients will be unable to assume a short position including as part of a spread. The only time a short order will be allowed will be in the case of a roll trade that results in a long position. In addition, market orders will not be accepted.

If this is in any way widespread the whole concept of a futures contract on Bitcoin may be holed below the waterline. As I pointed out earlier the ability to sell short is if not the modus operandi a big point of having a futures market. Added to that is that there are of course plenty of risks in being long Bitcoin at current levels. Are market prices supposed to bring a balance between the risk of buying and selling?


Actually although the media seems to have mostly overlooked it there was a clear signal of the inability for at least some to short Bitcoin futures.

No wonder sellers want a premium if it is difficult or even not possible to sell unless you have already bought.  On such a road then the price may well keep singing along with Jackie Wilson.

Higher (lifting me)
Higher and higher (higher)

As someone who has spent plenty of years in such markets the apparent inability to do spreads ( trading January versus March for example) is another issue. Say there is a large buyer for January futures and a seller in March, what used to be called locals would arbitrage that out adding to liquidity. You see these markets need someone to trade with otherwise they curl up and die. Another sign of trouble can be higher fees like this from the FT earlier.

The Singapore Exchange is to increase fees as much as 10-fold for derivative trading members next year, following a recent large technology upgrade. As of January, annual fees for proprietary trading members such as big global banks with direct market access will jump from S$2,000 to as much as S$25,000 in some cases, SGX said on Monday.

Also there is the underlying issue of what is a Bitcoin and if it is suitable for a futures contract in the first place?

Some of the issues I have raised today could be fixed if not at a stroke quite easily. But they need to be done as you see once a contract gets a reputation for being illiquid then it tends to die a death. So far 2768 is not all that brilliant especially if we allow for this.

CFE is waiving all of its transaction fees for XBT futures in December 2017.>

All that is before the Merc ( CME) starts trading them too.

Oh and some are suggesting option contracts ( my old stomping ground). How would that work unless you had the ability to hedge via selling futures?

Greece faces a cash crunch just as the Euro area is awash with liquidity

It was only on Friday that Greece was the subject of the analysis on this website and it is a sign of the times that it has pushed itself to the top of the agenda yet again. It really is extraordinary that a country which only provides some 2.9% of the capital for the European Central Bank is the source of such continual angst and worry, to say nothing about the suffering of the ordinary Greek citizen. But it finds itself being squeezed between the rock of the fact that it needs more financing and cash and the hard place which is that more Euro area austerity and hence likely suffering is required to get it.

The number of the day is Greece’s national debt to GDP ratio at the end of 2014 which was 177.1%. Why well it was 171.3% in 2011 before the PSI (Private Sector Involvement) which was supposed with reforms to put it on course for 120%. Up is the new down yet again!

Raiding the piggy-bank

Yesterday the Greek government acted to get its hands on any cash deposits held by local and municipal authorities. From Kathimerini

the government on Monday signed a legal degree obliging state bodies, with the exception of pension funds, to transfer their reserves to the Bank of Greece for the state’s use.

If you are wondering if pension funds will be exempt next time then I am sure that you are far from the only one?! This is estimated to raise some 1.2 billion Euros and will keep the wolf from the door for now. But of course he will keep knocking. There are obvious side-effects from this of which the simplest is that the bodies which had the cash mostly did so for a reason and what if they need it? Of course the elephant in the room is how far down this road is the new Greek government willing to travel?

Reverse Course

A crunch is being accelerated by the way that the Greek government is making extra spending commitments. In the instance quoted below by Kathimerini it is reversing previously planned cuts to pensions.

The government’s general secretariat has already received the draft amendments that will suspend the application of the zero-deficit clause on supplementary pensions, which would have led to cuts of 7 percent since the start of the year and 8 percent from July 1 onward.

The mathematical equation for the calculation of the retirement lump sum will also be revised, so the amount will not be less than that given to those who retired before August 31, 2013.

Could Greece raise its own funding?

The answer is yes as to a limited extent it already does so. Only last week on the 15th of April it issued some 13 week Treasury Bills. However in these times of ultra-low interest-rates a yield of 2.7% is a warning sign. You see my subject of yesterday Finland has a two-year yield of -0.21% and another seven of its Euro area colleagues also have negative bond yields at this maturity. Those of a nervous disposition might like to look away before I point out that the Greek equivalent is at 29% and nudging 30% today. An enormous gap which questions the whole concept of these nations being together in a single currency as we wonder what happened to the convergence of interest-rates which was promised? Yes the  official short-term rate can be set but the dreams of the same set of interest-rates applying  to each national economy have turned into a nightmare on Greece street.

The simple reason for the difference is the default risk for Greece is very high. If you are wondering why Italy and Portugal who also possess a substantial if lower default risk than Greece are not on the same boat that is because the ECB is keeping their yields low via its QE (Quantitative Easing) purchases. It has a problem with buying existing bonds in Greece because it and the various bailout mechanisms own so much of it (~80%) already. As to buying freshly minted ones well that would be pretty explicit debt monetisation and the ECB prefers to keep that implicit.

In case you are wondering why in such circumstance investors only ask for 2.7% yield on Greek Treasury Bills? The answer is twofold. Firstly there is a type of convention that these are backed by the central bank which can always print to repay them. Of course that is dangerous in a country which has led to so many conventions being broken. But more crucially the Greek banks have been the major purchasers in recent times and as to the risks well when this has happened to you I guess your view of risk gets twisted and distorted.

Greek bank stocks index in Oct 2007: 78,000 points

Greek bank stocks index in April 2015: 431 points (H/T @ReutersJamie )

What about the central bank?

This can be a source of funding but as hinted at earlier the ECB has been active in this area for some time. ECB President Mario Draghi pointed this out at his latest monetary policy press conference.

As you know, we approved the ELA and we’ll continue to do so, extending liquidity to the Greek banks while they are solvent and they have adequate collateral. So far, we have reached an exposure to Greece of €110 billion, which is the highest in the euro area in relation to GDP.

Here we have an awkward situation where the ECB has splashed the cash in the past but now finds itself keeping the Bank of Greece on a very short leash. The amount of Emergency Liquidity Assistance or ELA is being increased in the hundreds of millions most weeks rather than the larger amounts the Greek authorities would like. No doubt the ECB is nervous about the 74 billion Euros of ELA already sitting on the balance sheet of the Bank of Greece and what would happen to it in a default.

As an aside this sort of situation covers what I meant when I wrote in the past about issues with the ECB performing the “lender of last resort” role as we can see circumstances where it would say no. In addition it is considering a tightening of its terms. From Bloomberg this morning.

ECB staff have produced a proposal to increase the haircuts banks take on the collateral they post when borrowing from the Bank of Greece, the people said, asking not to be named as the matter is private.

I will put “the matter is private” is my financial lexicon for these times! But we see that the heat is on although in a more optimistic vein I suppose one might argue that at least the Greek banks presumably have some collateral left!

A 2/3rds vote on the Governing Council of the ECB is required for such changes.

Yet more negativity

This has arrived this morning.


And yes it is time for Foreigner to get out their guitars and sing.

Feels like the first time, it feels like the first time
It feels like the very first time.

Someone has a sense of humour making the move so marginal but there has been a clear trend and we now know what tends to happen when this particular Rubicon is crossed. Also this one matters as many instruments,loans and structured products are indexed to 3 month Euribor as this from Patricia Kowsman of the Wall Street Journal highlights.

Some 43% of Portuguese mortgages with variable rates are linked to the 3-mo euribor

This is a watch this space moment and some may consider it to be like “lost in space”.

The bailout mechanisms

These have money to lend but not on terms –  austerity – which the current Greek government is willing to contemplate.


In the Euro area crisis few phrases have been as apt as that of, “Never believe anything until it is officially denied” variously credited to Otto Von Bismarck and Jim Hacker. On that front I bring you this mornings word from officialdom via TO BHMA.

The chief of the European Commission Jean-Claude Junker has ruled out the possibility of a Greek default and departure from the Eurozone.

Mind you he has previously incriminated himself.

When the going gets tough, you have to lie.

If we move to the economics and finance we see yet another quandary of the Euro area and credit crunch crisis. There is a flood of liquidity in the Euro area as evidenced by  another interest-rate benchmark plunging through the ice into below zero territory. Yet the place that most needs it,Greece, finds itself in a desert lacking liquidity and after last night’s move by its government there must be fears of another deposit outflow. This is a cycle which sucks ever more breath out of the Greek monetary system.

Meanwhile the world watches in a manner described by The Police.

Every breath you take
Every move you make
Every bond you break
Every step you take
I’ll be watching you

Every single day
Every word you say
Every game you play
Every night you stay
I’ll be watching you