Third Avenue says fund seized up before collapse amid redemption flood

BOSTON (Reuters) - Third Avenue’s Focused Credit Fund built up a $200 million cash position in the days before its collapse, but that was not enough to meet redemptions because it could not sell even its most liquid assets.

New York-based Third Avenue, which shocked Wall Street with its move to shut down the junk bond fund on Dec. 9, described the final days of its operations in a Wednesday filing with the U.S. Securities and Exchange Commission. Third Avenue acknowledged the SEC had concerns with the liquidation plan, which included blocking shareholder redemptions.

The nearly $800 million Focused Credit Fund had a negative total return of nearly 30 percent this year before its closure, according to Morningstar Inc. By contrast, the high-yield bond fund category is off 4.2 percent this year.

Third Avenue’s junk bond fund had an elevated level of illiquid, or hard-to-sell securities late this summer, up to 20 percent. But the percentage of the fund’s illiquid assets, including bankruptcy-related claims and the bonds of distressed companies, climbed in its final weeks as the fund experienced problems selling assets to meet a surging number of investor withdrawal requests.

Last week it had become apparent that the nearly $800 million fund could not find buyers even for otherwise liquid securities at “rational” prices and that redemptions would probably continue, the filing said.

Third Avenue said its management team kept the fund’s board of outside directors informed about the rapidly deteriorating condition of the Focused Credit Fund. The fund, which had about $3 billion in assets last year, had an estimated $1.1 billion in outflows during 2015, including about $317 million in November alone.

After meeting on Nov. 30, Dec. 7 and Dec. 9, the board ultimately voted unanimously to liquidate the fund, the filing said. Otherwise, institutional investors, which owned about 65 percent of the fund, would have an advantage over mom-and-pop retail investors.

Third Avenue has four remaining mutual funds and had about $8 billion in managed assets, as of Sept. 30.

Since the liquidation, Third Avenue and its long-time chief executive, David Barse, agreed to part ways.

Reporting by Tim McLaughlin; Editing by Chizu Nomiyama and Lisa Von Ahn