The Perils of Private (and Illiquid) Mutual Fund Investments
Three more black marks on the ledger.
This is a tale with disparate threads, but a single moral: Bad things happen when funds that are priced daily, and that offer daily liquidity to shareholders, hold securities that are neither priced frequently nor can be readily traded.
One prominent example was Third Avenue Focused Credit, about which I wrote this February. The fund bought so many illiquid issues that when it faced substantial redemptions in December 2015, it could not meet those requests by selling securities. It was forced to "gate"-- that is, to refuse redemption orders, while gradually liquidating its portfolio. The process required 2.5 years.
John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.