By Carolyn Cohn and Huw Jones
LONDON (Reuters) – Some of the world’s biggest fund managers are talking to investors and regulators about removing Russian assets from their funds, helping them unlock billions of dollars of investments that have become illiquid due to the war in Ukraine.
So-called “side pockets”, used by hedge funds during the global financial crisis, but previously not permitted for traditional European funds, separate often risky illiquid assets so that major funds can trade freely and attract new investors who would share no gain. or losses on those assets.
Last month, Schroders created side pockets for Russian assets in its Luxembourg-domiciled Emerging Europe fund, which has total assets of more than 200 million euros ($207 million), the company said. society.
Austrian Erste told Reuters he was considering a similar move for Russian assets in his suspended Emerging Europe fund.
PIMCO, one of the world’s largest credit asset managers, said it was also seeking approval for side pockets as a future option for some of its funds.
Until a few months ago, traditional funds sold to retail investors called UCITS or “undertakings for collective investment in transferable securities” funds were not allowed to create side pockets.
Regulators have always considered that delisting assets upfront would be more beneficial to investors than charging additional fees to create a side pocket.
However, watchdogs in Britain and the European Union as well as EU listing centers Dublin and Luxembourg have issued guidelines in recent weeks to allow side pockets only for sanctioned Russian assets, indicating that approval would be given on a case-by-case basis. base.
The heightened interest in the side pockets of frozen Russian assets coincides with expectations that some US and European banks and trading firms will start trading Russian government bonds.
The US Treasury’s Office of Foreign Assets Control (OFAC), which enforces US sanctions, last month cleared the way for US financial institutions to arrange deals in Russian securities if it would help US holders liquidate their positions. OFAC previously banned purchases of Russian stocks and bonds in the primary and secondary markets.
Fund managers in Europe have suspended about $6 billion in funds dedicated to Russia and emerging Europe following the invasion of Ukraine, Morningstar data shows, to prevent a disorderly rush to exits. . Russian assets could not be traded and were usually reduced to zero.
Most have not reopened due to trading difficulties, while asset managers including BlackRock, Danske, Jupiter and Nordea have closed these funds altogether.
Side pockets could free up those funds, said Patrick Kehoe, head of strategic solutions for hedge funds at consultants Lionpoint.
“These (Russian) assets could be under water for 20 years,” he said.
“Retail funds don’t have the ability to wait long to unwind these assets.”
Schroders reopened its suspended fund on July 18. The fund’s assets under management (AUM), however, have more than halved since the invasion, according to Morningstar data.
Side pockets containing Russian assets remain suspended, but once Russian assets start trading “more normally”, existing investors will benefit from any increases, Schroders said in a letter to investors on its website dated July 4. .
Luxembourg securities watchdog CSSF told Reuters that a limited number of funds in the Grand Duchy have set up a side pocket, with lawyers pointing to the cost and complexity of setting them up.
PIMCO will ask its shareholders on September 14 for authorization to have them as an option in certain UCITS funds.
A spokesman said this was to reflect new policy from PIMCO’s regulator, the Central Bank of Ireland. PIMCO said it was not considering creating side pockets for UCITS funds and would seek regulatory and shareholder approval first if this changes.
Britain’s Financial Conduct Authority said it had “conversations” with some companies, but no official request.
Julian Brown, a partner at law firm Eversheds Sutherland, said the side pockets were complex and simply closing the fund could be easier.
Law firm Macfarlanes said asset managers could be deterred by the cost and that a continued suspension or permanent closure could be more cost-effective.
($1 = 0.9669 euros)
(Reporting by Carolyn Cohn and Huw Jones, Editing by Sinead Cruise and Elaine Hardcastle)