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Strategies for managing through challenging markets

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2020 has been a reminder that unforeseen circumstances can cause even the most stable of investment environments to switch quickly into being unpredictable and volatile.

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By Anne-Marie Leadbetter and Martin Trott – 2020 has been a reminder that unforeseen circumstances can cause even the most stable of investment environments to switch quickly into being unpredictable and volatile. The global Covid-19 pandemic shifted the upward market trend of 2019 into a rapid drop in March 2020 resulting in 25 per cent or more decline in the value of global stocks. The market has since rallied upwards but the effect of the pandemic can still be seen in certain asset classes.

Increased market volatility directly impacts trading and valuations – investment professionals need to be able to manage and evaluate their portfolios through this uncertainty. Investors can become distressed while they see the value of their portfolios plummet as they evaluate their holdings overall to determine if they have the right mix to weather the storm. This may result in increased redemptions, causing stress on both the investor and the investment manager as they need to liquidate in a volatile market. Certain asset classes become illiquid and difficult to value – who wants to buy an aircraft in a global pandemic? Below are some key strategies for managing through challenging times

First and foremost, investment managers need to have strong relationships with their board of directors and investors. Open and honest communication about the investment portfolio, what issues surround the underlying assets and what the investment manager is doing to manage the risks and liquidity of the fund overall is essential. While it may not mitigate the need for the investor to withdraw funds at a particularly volatile time, it will go a long way to ensuring goodwill and trust between the two parties and hopefully provide the investor with confidence that the portfolio is in safe hands. Communication with the directors around valuation and liquidity issues is critical. An active and engaged board of directors can help manage the risks surrounding the fund and ensure that all investors are treated equally in a manner that is in the best interests of the fund. In some cases, this involves making the hard decisions to gate or defer redemptions until the market is in a better place to help mitigate the risk of having to fire sell assets at a temporary loss to try and create forced liquidity which ends up hurting all investors. In the most difficult situations, the board of directors may have to make the decision to wind down the fund in the case where the strategy no longer makes sense or where substantially all of the investors want to redeem. In this case, considered steps must be taken to ensure that this is done in a thoughtful and equitable manner.

In some situations, seeking the advice of others can be key in preserving value and putting in place the optimal strategy. Restructuring experts can offer solutions to help investment managers and the board control costs and maximise the returns for the investors. Certain non-core and illiquid assets can be packaged into a vehicle for disposal in order to provide liquidity for the fund and its investors as well as focusing the manager’s attention on growth assets and strategies. In some cases, a managed exit via a solvent wind down engaging the services of an experienced liquidator or specialist independent director will be the solution rather than depleting resources further by continuing with the previous fund strategy. In the end, it will come down to what is in the best interests of investors and an independent assessment of the options could prove vital in such uncertain times.

Anne-Marie Leadbetter is a Director of HTC Fiduciary Services Limited and an officer of The Harbour Trust Co Ltd (together, doing business as Harbour), and is responsible for providing fiduciary services to Harbour’s fund clients, including serving as an independent director for such funds.

Martin Trott is a director of R&H Restructuring (Cayman) Ltd and R&H Restructuring (BVI) Ltd, and has broad experience in leading complex administrations, liquidations and receiverships across a number of industry sectors. He specialises in corporate restructuring and insolvency, as an insolvency practitioner in the Cayman Islands and qualified accountant with over 24 years’ experience. He has significant cross border experience having worked with corporates in the UK, the US, the Caribbean region, Ireland, the Far East, Channel Islands and continental Europe.

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