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Natixis H2O Fund Controversy Hangs on an Arcane Definition

Thomas Beardsworth, Lucca de Paoli and Suzy Waite
(Bloomberg) -- The latest turmoil in European finance is swirling around H2O Asset Management, a London-based firm that boomed since its founding almost a decade ago with the backing of French investment bank Natixis SA.H2O’s funds hemorrhaged billions over four days amid gathering concern over investments in illiquid bonds tied to a controversial German financier. The asset manager is fighting back, aiming to assure investors it can meet redemptions. There were signs of some stabilization after the fund on Wednesday reported that withdrawals “markedly subsided.”Here are the main people involved in the saga, which has punished Natixis’s stock.Lars WindhorstH2O’s relationship with Windhorst is at the core of the matter. The 42-year-old was a wunderkind of German finance in the 1990s, but later filed for bankruptcy. He bounced back with a company now called Tennor Holding, whose most well-known investment is the La Perla lingerie brand. The firm came to rely on private bond placements to raise money rather than conventional bank financing, and H2O has emerged as among the biggest buyers of this debt.H2O’s crisis kicked off when Morningstar Inc. put H2O’s rating under review, citing concerns about the “liquidity and appropriateness” of some corporate-bond holdings. While Morningstar didn’t specifically mention Windhorst, H2O has defended the relationship, calling him “a reliable business partner.” It has also had to sell some Windhorst-linked debt.In 2016, Goldman Sachs Group Inc. bankers were caught up in a troubled trade involving Windhorst that unexpectedly exposed the bank to potential losses.Bruno CrastesCrastes runs H2O, and worked for years at Credit Agricole Asset Management, presiding over a boom in alternative, absolute-return funds in the early 2000s. In 2009, as chief investment officer for the U.K., he correctly predicted the euro would weaken from historic highs, though it didn’t quite make it to parity with the dollar as he forecast.As that division of the French bank was folded into what became Amundi SA, the Frenchman co-founded H2O in partnership with Natixis, which was still reeling from subprime losses at its investment bank and scouting for opportunities in the seemingly steadier world of fund management. Crastes drove total assets under management to more than $32 billion at the end of 2018.A student of behavioural finance, he named the fund H2O to represent transparency and liquidity. In a 2011 video, he discusses the travails of risk-allocation products that had “let investors down because they weren’t liquid enough, like funds of hedge funds.”Crastes, 54, says his links to Windhorst date to 2015; he joined Tennor’s advisory board in April, but left last week in an effort to ease corporate-governance concerns.Francois Riahi Francois RiahiSource: Groupe BPCERiahi, a 46-year-old product of France’s elite ENA school with deep roots in government, didn’t have much of a honeymoon as Natixis’s CEO. H2O isn’t the only headache since he took the reins last June; in the fourth quarter of 2018, a push into complex derivatives in Korea known as autocallables went sour, losing almost $300 million, people familiar with the matter said at the time. Riahi’s previous roles included overseeing Natixis’s expansion in Asia and working at Groupe BPCE, the bank’s parent company.Jean RabyThe Canadian, Harvard-educated lawyer oversees Natixis’s investment-management activities globally, and is knee-deep in the efforts at damage control. He has spent the bulk of his career in Paris, where he worked in Goldman Sachs Group Inc.’s office. Raby, 53, joined Natixis in 2017 after a stint as Alcatel-Lucent’s finance chief, replacing Pierre Servant. The division he oversees includes a series of well-known autonomous boutiques besides H2O, such as Harris Associates and Loomis Sayles in the U.S.Laurent MignonMignon, 55, was Riahi’s predecessor as Natixis CEO, spending a decade in the role; he now serves as chairman, as well as head of Groupe BPCE -- a sprawling network of cooperative retail banks. Credited with helping salvage Natixis after the financial crisis, Mignon oversaw initiatives including the growing push into asset management.Vincent ChailleyChailley is H2O’s chief investment officer, and had worked with Crastes since the 1990s. At CAAM, he ran the fixed-income team in London, following advanced education in subjects including mathematical modeling. Chailley is Crastes’ replacement on Tennor’s advisory board.\--With assistance from Fabio Benedetti-Valentini.To contact the reporter on this story: Keith Campbell in London at k.campbell@bloomberg.netTo contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Dale CroftsFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

(Bloomberg) -- When is a bond not a bond?

That’s the question some analysts are raising about securities owned by H2O Asset Management, the third major European fund manager to face market turmoil in less than a year amid questions about the liquidity of its investments.

H20 funds came under scrutiny last week for holding bonds linked to private companies from lingerie to robotics in sales arranged by Lars Windhorst. Unlike traditional bonds, the notes are akin to loans repackaged into so-called private placements, according to research firm Autonomous.

The distinction matters because H20’s Allegro, Adagio and Multibonds funds are not permitted to hold loans, which are harder to trade than bonds and generally lack the serial codes known as ISINs that debt securities are assigned. Other U.K. fund managers including Neil Woodford have faced questions over whether they’ve circumvented liquidity restrictions by re-packaging assets amid heavy redemptions.

“Everything H2O and Natixis have said about the nature of the private placements suggests to us that they are economically loans, rather than debt securities,” analysts at Autonomous said in a client note after executives at the French bank - which owns London-based H20 - held a conference call for investors on Friday morning.

“There have been no obvious or major violations of rules, commitments or duties by H2O,” the analysts wrote. “But various angles of the story leave a bitter aftertaste.”

How Natixis’s H2O Funds Are Linked to German Financier Windhorst

Natixis said on Monday that it had marked down part of the Windhorst portfolio. A spokesman for H2O, whose assets doubled since 2017 to $37.6 billion before last week’s tumult, told Bloomberg on Friday that it rejects Autonomous’s analysis that the notes resemble loans. Bruno Crastes, H20’s founder, defended the investments in a French TV interview posted the same day saying that “you need to go where others don’t go” to generate superior returns.

Redemption Rush

H20’s flagship funds slumped by 1.1 billion euros ($1.25 billion) Thursday, after the research and rating company Morningstar published a report questioning the “liquidity and appropriateness” of some holdings. Morningstar’s decision to suspend the fund’s rating came after the Financial Times wrote about H2O’s exposure to the bonds last week.

Before suffering a rush of redemption requests and freezing his fund this month, U.K. stock-picker Woodford listed some of his unlisted securities on a stock exchange in Guernsey. That allowed him to stay within pre-set rules restricting illiquid holdings. GAM Holding AG also dismissed a senior money manager partly for performing insufficient due diligence on unlisted debt securities it has taken almost a year to sell.

“A piece of financial transformation is going on to take something from A to B, whether it’s in Guernsey or creating an ISIN out of thin air,” said Chris Redmond, global head of credit and diversifying strategies at Willis Towers Watson, which advises pension funds on where to place their money. “This is classic late-stage cycle behavior.”

The question now is whether the illiquid investments that have caused trouble for H20, GAM and Woodford represent a wider trend in the fund-management industry. Jacob Schmidt, CEO of Schmidt Research Partners, a global investment firm, argues that they are “isolated incidents.”

“Woodford was a 100% retail offering and ran his own independent start-up,” Schmidt said. “H20 was part of a major firm and mostly had institutional and high net worth clients. In a way, I’d expect higher standards from a firm like H20 or GAM than a firm like Woodford’s.”

--With assistance from Luca Casiraghi.

To contact the reporters on this story: Thomas Beardsworth in London at tbeardsworth@bloomberg.net;Lucca de Paoli in London at gdepaoli1@bloomberg.net;Suzy Waite in London at swaite8@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Abigail Moses

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.