One Way Door in Property Funds

The BBC is reporting No exit for Friends property fund.

Insurer Friends Provident has told investors in its £1.2bn property fund that they must wait to access their money because of a market downturn. It said it had taken the measure to avoid having to sell commercial property such as shops and office blocks in a hurry at low prices.

Investors must now hold off for six months before being able to take cash. The BBC's business editor Robert Peston said there has been a "collapse of confidence in commercial property". "The flight from property is a pronounced trend," he explained.

"Friends is the first fund to prevent retail investors cashing in, but other fund managers, including Schroders and UBS, have put a block on withdrawals by institutional clients," he added. "Their behaviour is rational, if alarming.

It has been reported that the fund's cash buffer of 14% in July had been reduced to 5% by departing customers.

"Unless investors' demands for redemptions are stemmed, there would be forced sales of substantial properties," Mr Peston continued. "And such forced sales would precipitate a vicious, self-reinforcing downward spiral in property prices."

"For banks and other financial institutions, the next wave of losses after sub-prime is likely to come from direct and indirect lending to commercial property," Mr Peston said.

You cannot stem investors from wanting to leave by freezing the fund, any fund.

Freezing the property funds now makes as much sense as Bear Stearns freezing their hedge funds in February. Had investors been allowed to exit they would have gotten at least something back. It might have been 40% but it would have been non-zero. Now Bear Stearns Fund Manager Probed on Withdrawal.

Federal criminal prosecutors investigating the collapse of two internal hedge funds at Wall Street firm Bear Stearns Cos. are examining whether a Bear executive improperly withdrew money he had invested in one of the funds while making optimistic forecasts about the portfolio's prospects, people familiar with the matter say.

Weeks before the two funds began imploding in April, fund manager Ralph Cioffi moved about $2 million of his own money from the riskier of the two hedge funds into another internal fund with a separate investment strategy, these people say.

Mr. Cioffi's move effectively lowered his exposure to the riskier of the two failed funds when it was on the brink of significant declines, these people say. No other senior Bear executive invested in the funds, according to people familiar with the matter.

So not only did Bear Stearns freeze withdrawals, the fund manager himself exited while making bullish pronouncements. One of the funds later went to zero, the other to a few cents on the dollar. Unfortunate investors were trapped all the way.

Commercial real estate prices are headed lower. The proper strategy is to sell now to minimize losses. However, no one can exit. The door is closed and investors are trapped in a sinking ship. Why anyone want to invest in any fund that has a door open for entry but closed for withdrawals is beyond me.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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