Curriculum·Graduate·G805
Redemption, Gating, and Secondary Liquidity
The Woodford Equity Income Fund, 2019. This was a large, popular UK investment fund that let ordinary investors put money in and take it out on demand, an open-ended, daily-dealing fund, while it held a growing portion of its money in illiquid assets that could not be sold quickly.
Lesson 1 opens on
The Woodford Equity Income Fund, 2019
The Woodford Equity Income Fund was a large, popular UK investment fund run by a well-known manager, and it was open-ended and daily-dealing: investors could put money in and take it out on any business day at the fund's stated value. Over time, though, the fund came to hold a growing share of illiquid assets, small and unquoted companies whose shares could not be sold quickly without moving the price; the FCA's preliminary inquiries put its unlisted exposure at around 20 percent of its value in February 2019, against a 10 percent limit.6 billion pounds, and was ultimately wound down, with investors getting their money back slowly over years and taking losses.
The lessons
- G805-01The liquidity mismatch: instant token, illiquid assetExplain that a liquidity mismatch is promising fast redemption over assets that cannot be sold fastabout 34 min · opens on The Woodford Equity Income Fund, 2019
- G805-02Redemption engineering: honoring the token with the underlyingExplain that redemption must be met by selling the underlying, so its terms must fit the underlying's liquidityabout 35 min · opens on The Third Avenue Focused Credit Fund, 2015
- G805-03Gating provisions: designing the pause before the runExplain that a gate is a pre-designed pause on redemptions that prevents a fire sale but traps holdersabout 34 min · opens on The M&G Property Portfolio suspension, 2019 to 2021
- G805-04Secondary market liquidity for a restricted tokenExplain that secondary liquidity resting on a fragile mechanism can vanish under stress, leaving holders stuckabout 34 min · opens on The auction-rate securities freeze, February 2008