By Matt Wirz 

A roughly EUR458 million ($505 million) European mutual fund with investments managed by London-based Selwood Asset Management LLP has imposed a levy on shareholders trying to exit from the fund, showing how reduced liquidity in credit markets continues to hurt investors.

The credit-focused fund instituted the penalty on redemptions in order to protect shareholders who opt to stay invested, according to a notice sent to investors Wednesday. The unusual move comes despite efforts by the U.S. Federal Reserve to ease strains in debt markets by pumping cash into the financial system.

Economic fallout from the new coronavirus pandemic has caused sharp drops in prices of the credit-default-swap indexes that the fund invests in, dragging down the value of assets it would sell to pay out redemptions. The so-called dilution levy of up to 5% would offset those trading costs for shareholders who remain in the fund, called Alma Platinum IV Selwood Market Neutral Credit, the notice said.

The imposition of the levy comes as some other asset managers with exposure to complex derivatives are also taking measures to address redemptions. French money manager Exane Asset Management last week suspended redemptions from one of its stock funds, citing a significant shift in the value of derivatives held by the fund.

Officials at Selwood and Exane couldn't immediately be reached for comment.

Selwood, which was founded by Sofiane Gharred in 2015 and also operates a larger private hedge fund, manages the investments in the fund while Alma Capital, a platform for boutique investment managers, handles its administration and marketing.

The fund primarily invests in indexes that track the performance of bundles of corporate credit-default swaps, along with in some of the swaps included in the indexes, aiming to take advantage of pricing differences between the two. The complex strategy is meant to deliver "market neutral" performance, meaning steady returns regardless of the direction of the broader market. Selwood may borrow up to 10% of the fund's value and use that leverage to increase its investments, according to fund marketing materials.

The fund has lost about 4.8% this year though March 30, according to data from Morningstar. It returned 3.4% last year and 4.9% in 2018, according to disclosures by Alma.

"In such an environment, the main risk when you have a fund with weekly or daily liquidity and the assets in the fund become less liquid is you get a mismatch between the liquidity of the fund and the liquidity of the assets in the fund," said Alma Capital Chief executive Officer Henri Vernhes. Investors in the Selwood fund are permitted to redeem shares once a week, and the levy is the first Alma has implemented on any of the funds it manages in its 10-year history, he said.

Redemptions have been relatively modest so far, amounting to between 10% and 15% of assets in the fund, which managed about EUR500 million before the recent market turbulence, Mr. Vernhes said.

Elsewhere in debt markets, the yield on the benchmark 10-year U.S. Treasury note fell to 0.630% Wednesday, from 0.691% Tuesday, following data suggesting mounting job losses and a contraction in manufacturing. The WSJ Dollar Index, which measures the U.S. currency against 16 others, gained 0.5%.

Write to Matt Wirz at matthieu.wirz@wsj.com

(END) Dow Jones Newswires

April 01, 2020 17:53 ET (21:53 GMT)

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