Investor Recovery Options for High Yield Fund Investors

shutterstock_183549914The investment attorneys of Gana LLP are investigating potential recovery options for investors in various high yield “junk” bond funds. InvestmentNews recently published a list of 10 high yield funds that have a high level of exposure to distressed debt:

  • Federated High Yield Service (FHYTX)
  • Waddell & Reed High-Income A (UNHIX)
  • Osterweis Strategic Income (OSTIX)
  • Fidelity Advisor High Income Advantage A (FAHDX)
  • Ivy High Income C (WRHIX)
  • Third Avenue Focused Credit Instl (TFCIX)
  • Artisan High Income Advisor (APDFX)
  • American Funds American High-Inc A (AHITX)
  • Western Asset Short Duration High Inc B (SHICX)
  • Northern Multi Manager Hi Yield Opp (NMHYX)

As we recently reported, one fund that has halted operations in the wake of market turbulence is the Third Avenue Focused Credit Fund (TFCIX) managed by Third Avenue Management LLC. According to the Wall Street Journal, the mutual fund halted redemptions and announced plans to liquidate effectively freezing investor’s $789 million in investment assets that was supposed to provide mom and pop investors with easy access to their cash. Now investors in the Third Avenue Focused Credit Fund may not receive all their money back for months, if not longer while the fund liquidates.

These funds hold “junk bonds” or bonds that have been rated below investment grade by the major rating agencies – below BBB. Junk bonds typically have high yields to compensate investors for increased risks than higher rated bonds, but the high risk of default in a relatively short period of time must be weighed against the increase yield. People may be tempted to invest money into junk bonds when the economy is doing well and when interest rates on higher rated bonds or fixed income investments are paying lower yields. However, when markets become turbulent junk bonds can quickly begin trading with even greater volatility than equities and suffer from swift downgrades and defaults often catching investors off guard.

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.

The attorneys at Gana LLP are experienced in representing investors in cases where brokers make unsuitable recommendations. Investors who have suffered losses may be able recover their losses through securities arbitration. Our consultations are free of charge and the firm is only compensated if you recover.