A conversation with Alexander Friedman, Group CEO
GAM received a high level of redemption requests for the ARBF funds following the announcement on 31 July that Tim Haywood, investment director in the ARBF team, was suspended. The liquidation approach will allow us to balance value maximisation with speed of liquidation.
Our priority is to balance value maximisation with a timely return of assets for our investors. We had started to de-risk the portfolios prior to the official date of liquidation (31 August 2018). However, the portfolios were still actively managed within the investment guidelines set out in the respective fund prospectus. In a liquidation situation, we are permitted to deviate from the investment guidelines in order to create liquidity. There are two elements which influence the residual amounts that still need to be distributed to investors. One is the margin requirements of the existing portfolios, which as per definition is usually liquid, and the second is the fact we are conservative with the distribution percentages as stated in the letter to investors. There will be subsequent distributions dependent on market conditions.
GAM made the first significant distribution payments to investors in early September and will liquidate the rest of the holdings thereafter, dependent on market conditions. First payments returned between 74% and 87% of the Luxembourg and Irish-domiciled UCITS funds, and between 60% and 66% of the assets in the Cayman master fund and the associated Cayman and Australian feeder funds. Details for each fund have been communicated to respective fund investors directly. Our expectation is that we will make a further distribution payment for each fund by the end of September 2018, with subsequent distribution payments in the coming months, dependent on market conditions. Fund investors will receive further communications in Q4 2018.
The ARBF funds have a mix of mainly liquid assets and some less liquid assets, and we are focused on ensuring we balance value maximisation with speed of liquidation. This is why the first distributions will vary in size for different funds.
Not at this stage. The wind down of the Cayman funds and the realisation of their assets will take place outside of a formal voluntary liquidation process, under the supervision of the boards of directors. Net assets will be returned to investors through a compulsory redemption of shares. However, it is anticipated that professional independent third-party liquidators will be appointed at or toward the end of that process.
GAM’s priority is to maximise value for the investors throughout the liquidation process. The ARBF funds have a mix of mainly liquid assets and some less liquid assets, and we anticipate that the pace of disposals will be different for different assets in the portfolios. Our team’s focus will be on optimising the prices it can obtain for all assets to maximise value for clients. Our expectation is that we will make a further distribution for each fund by the end of September, with subsequent distributions in the coming months, dependent on market conditions.
Our focus will be on optimising the prices we can obtain for all assets to maximise value for clients. As such, we cannot provide additional details on the ARBF funds’ less liquid assets during this stage of the liquidation process, as this could put GAM’s liquidation efforts and fund investors at a disadvantage when these assets are liquidated.
GAM’s priority is to balance speed of liquidation with maximising value for investors.
GAM will cover normal course advisory and legal costs, while the funds will pay for the ordinary trading and the required liquidation costs, such as liquidation audit costs.
GAM will offer opportunities to reinvest the liquidation proceeds into alternative structures. A UCITS fund is expected to be available for investors in the coming weeks, and we are also setting up a new Cayman fund. Please contact your GAM relationship manager if you are interested in more information about these alternative structures.
All other investment teams at GAM and its third-party managers are managing client money as normal.
All investors in the funds as of the liquidation date will automatically receive their proportionate share of the liquidation proceeds in cash as they become available, whether or not they have submitted a redemption request. GAM will inform all investors ahead of any distributions.
GAM is committed to ensuring equal and fair treatment to all investors. Proceeds from the liquidation of the funds will be proportionately paid out to all investors at the same time.
Yes, GAM will continue to publish NAV values for all funds. These values will decline for the Australian-domiciled funds as and when distributions are made as part of the liquidation process.
GAM will be making distributions throughout the liquidation process based on each investor’s proportionate interest in the funds as at the liquidation date.
Liquidation date is the date when the funds start liquidating the securities they hold.
There may be tax implications for investors as a result of receiving proceeds from the liquidations, depending on jurisdiction and each investor’s individual circumstances. Investors should seek guidance from their tax advisor.
GAM’s internal investigation
As we stated in the announcement of 31 July 2018, we conducted a thorough investigation1 involving external advisors. This part of our internal investigation is largely completed. We now intend to follow our internal disciplinary processes. We hope to complete that swiftly.
An investigation into concerns raised internally commenced in November 2017. Through the course of that internal investigation, which was supported by external counsel, a series of potential conduct issues were identified through and up to July 2018.
GAM’s investigation took a detailed look at Mr Haywood’s conduct.
No other employees are being investigated in relation to these matters and no evidence was found to indicate such an investigation regarding other employees was required.
The investigation concluded that in certain instances Mr Haywood may have failed, in GAM’s judgement, to conduct or evidence sufficient due diligence on some of the investments that were made, or make accessible internal records of documents relating to these. Additionally, the investigation concluded that Mr Haywood may have breached the firm’s signatory policy by signing alone certain contracts where two signatures were necessary. And he breached the company’s gifts and entertainment policy by not asking for required pre-approval and used his personal email for work purposes.
We have found no material client detriment to date, and are keeping this under review.
The investigation concluded that in certain instances Mr Haywood may have failed, in GAM’s judgement, to conduct or evidence sufficient due diligence on some of the investments that were made, or make accessible internal records of documents relating to these. The holding of these investments is not prohibited by any of the restrictions applying to the respective funds.
The investigation found no evidence that Mr Haywood was motivated by an improper rationale in making investment decisions or that there was any conflict of interest between him and clients.
Mr Haywood was in an unusual position as both a member of the Board of Directors of GAM International Management Limited and a portfolio manager, which meant an external party might rely upon his single signature despite GAM’s two-signatory policy. We have taken steps to ensure that, going forward, portfolio managers are not directors of any of our investment advisory entities.
While Mr Haywood has been suspended, he remains an employee of GAM and we now intend to go through the firm’s internal disciplinary processes. We do not believe it is appropriate to comment any further pending the completion of those processes.
Investment directors Jack Flaherty and Alex McKnight have assumed joint responsibility for the ARBF and other associated portfolios. Jack Flaherty has been one of the co-managers of the ARBF strategy for more than six years, while Alex McKnight has been a key member of the ARBF team for the past 11 years. They remain supported by 18 other experienced investment professionals, who continue to manage client portfolios in accordance with the same investment philosophy that has been in place since the strategy’s inception in 2004.
Jack Flaherty and Alex McKnight have 33 and 21 years of investment experience, respectively. Jack Flaherty is based in New York, and Alex McKnight is now based in London, having been in New York previously.
Jack Flaherty is an investment director responsible for the co-management of GAM’s unconstrained/absolute return bond strategy, a position he has held since 2012. He is also responsible for credit positions and strategies within the strategy – ranging from investment grade to high yield debt including both asset-backed and mortgage-backed securities allocations. In addition he has extensive experience in structured credit, trade finance, lending strategies and insurance linked securities both at GAM from prior roles. He was previously global co-head of credit fixed income and global head of emerging markets at UBS, and has also worked as a managing director at Barclays Capital in charge of credit fixed income. Jack Flaherty holds a BA in Economics from the University of Illinois, an MBA in Finance and Accounting from the University of Chicago and the Series 7, 63 and 24 qualifications. He is based in New York.
Alex McKnight is an investment director responsible for the co-management of GAM’s unconstrained/absolute return bond strategy. Within the team he has specialised in convertible bond strategies, in addition to managing overlay credit and equity-linked strategies. He joined GAM following its acquisition of the fixed income and foreign exchange specialist, Augustus, in May 2009. Alex McKnight joined Augustus in 2007 from Allied Irish Bank (AIB), where he was a senior trader for European convertible bonds within the fixed income group. Prior to this, he was a credit analyst at AIB and began his career in markets there as a foreign exchange trader in 1996. Alex McKnight holds a BComm from the University College Dublin and is a CFA charterholder. He is based in London.
GAM’s financial stability remains strong and is not affected by the recent events. As at 30 June 2018 the Group has no financial debt and CHF 327.9 million of cash and cash equivalents.
As part of our stated strategy, GAM has been investing to progressively strengthen its structures, processes and systems, including its risk and compliance teams and their capabilities, to meet an increasingly complex regulatory and business environment.
Some of the specific steps we have taken to strengthen our risk management approach across our three lines of defence are listed below:
First line: In 2017, GAM created a new role of head of investments and hired an individual who has approximately 20 years of relevant investment and control experience, to strengthen the first line investment oversight across key investment and trading areas. Further, a new and dedicated front office controls function has been created with responsibility for managing risk within the front office control environment. Additionally, GAM is making enhancements to the day to day oversight of risk by shifting current regionally-based governance arrangements to a group-led model via the implementation of a series of group oversight committees covering risk, compliance, investment, distribution and change activities.
Second line: Since the end of 2016, staff levels in the risk and compliance functions have been increased. Further, GAM took the decision to separate the compliance and legal function in 2018 to reinforce the critical importance of these functions in their own right. Additionally, specialist compliance expertise has been recently recruited in the areas of financial crime and conflicts of interest. Both the group chief risk officer and group head of compliance roles now report to the group chief executive officer and are part of the Group Management Board (GMB), underscoring the importance of these functions to GAM. At the end of 2017, the quantitative analytics team, formerly within the operations function, joined the risk function to provide greater independence. In 2018, the risk function took over group-wide ownership for the investment restrictions compliance monitoring activities. Both the compliance and risk functions will continue to assess their effectiveness and related capabilities as part of our ongoing commitment to operate robust risk management across the group.
Third line: A new head of internal audit with extensive asset management experience was hired end of 2017, and the team has been strengthened by the hiring of additional roles. The function is in the process of recruiting a senior auditor with specialist experience in the trading and investment management area. These, amongst other planned enhancements to methodology and reporting, will further support internal audit in providing assurance on the operation of first and second line activities to manage risk.
No control framework can completely remove all risk of individual employee misconduct or guarantee its immediate detection.
Mr Haywood was in an unusual position as both a member of the Board of Directors of GAM International Management Limited and a portfolio manager, which meant an external party might rely upon his single signature despite GAM’s two-signatory policy.
Nevertheless, as a result of the findings from our investigation, we have made a number of improvements to our policies and procedures, for example, we have:
We have continued to strengthen our three lines of defence model with a number of enhancements over the past 12 to 18 months in the following areas:
1 Our investigation is confidential and subject to legal privilege. GAM does not waive confidentiality or privilege in the investigation.