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Swiss fund manager GAM seems to be in all sorts of trouble at the moment as it has suspended redemptions from one of its bond funds, GAM Multibond – Absolute Return. This followed an internal investigation into risk management and record keeping. GAM had already been trying to off-load some fixed income securities from the fund before announcing that it was suspending redemptions.

The plot thickens as it seems that a fund manager at the firm may have been buying illiquid debt securities that were not subject to proper due diligence or risk controls. Its CEO, Alexander Friedman, said in a statement that there had not been a departure from the legitimate investment strategy, although while redemptions at the GAM absolute return funds are suspended, GAM will not be charging any management fees on those funds.

Investors are always nervous when a flagship bond fund suspends redemptions. Many still remember 2007-2008 when it was bond funds suddenly gating their investors that served as an early warning that things might not be well within the international banking system. In GAM’s case it is beginning to look more like a fund manager packing instruments into his fund that he is not meant to, which speaks to lax internal risk controls at GAM.

“Unconstrained and absolute return funds investing is – to a point – ‘black box’ investing for investors and advisors,” says Lev Revutsky, an investment analyst with LPL Financial. “Under certain adverse market conditions they may backfire. Invest with caution!”

The fund’s manager, Tim Haywood, is no small fry within wealth management: he is the business unit head of GAM’s £8.5 billion bond fund strategy. He was made director of the firm’s bond business in 2009. He joined the firm from Augustus Asset Managers where he was a director for 11 years.

All subscriptions and redemptions in the GAM absolute return bond funds were suspended at the end of last month, and Haywood was suspended pending further investigation. This is partly a defensive measure now, as the GAM absolute return funds would otherwise be facing dozens of redemption requests from clients who will be worried that they are in trouble.

GAM said in a statement at the end of last week that no other part of its business is affected. Its other investment teams and third party managers are continuing to manage client funds as normal.

“The board of directors acknowledges that recent events have been a setback for the company,” said Hugh Scott-Barrett, chairman of GAM. “We have absolute confidence in the strength of GAM as a diversified asset manager and the ability of its investment teams to deliver returns for clients. We have a clear strategy and management and will continue to execute against it.”

Swiss-listed GAM Holding has seen its share price drop from CHF 13.48 on Tuesday to CHF 8.92 today as news of the problems continues to damage confidence in the fund manager.

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Stuart Fieldhouse

Stuart Fieldhouse has spent over 20 years in journalism and financial communications, including six years as a wealth management correspondent for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong.

Stuart has worked as head of content at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Stuart continues to work with hedge funds, private banks, stock exchanges and other financial institutions on their communications, data and marketing requirements.

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