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Behind H2O’s Turmoil: Raters, Regulators and Liquidity

Bank Of England Cuts Forecasts, Says Brexit Damage to Economy Has Risen
Photographer: Simon Dawson/Bloomberg

“You can’t always get what you want,” the Rolling Stones sang. The band didn’t have illiquid assets in mind, but investors who put their money into funds that put it into things that can be hard to sell in a hurry would certainly agree, as was shown by recent market turmoil. Bank of England Governor Mark Carney said funds that hold illiquid assets but allow unlimited withdrawals have been “built on a lie.” Carney warned that the risks are “systemic,” with some $30 trillion tied up in difficult-to-trade instruments. A lot of that money is in mutual funds and exchange-traded products owned by mom and pop investors, raising questions of who’s responsible for keeping investors safe from having liquidity dry up at just the wrong time.

In June, managers froze withdrawals from a fund run by Neil Woodford, one of Britain’s most famous stock pickers; that followed a move to block massive outflows at Swiss asset manager GAM Holding AG, where star bond manager Tim Haywood was dismissed in February. Now a global macro fund run by London-based H2O Asset Management is facing the equivalent of a run on the bank.