Growing Unease as British Mutual Funds Block the Exit Doors | Hacker News Reader

Growing Unease as British Mutual Funds Block the Exit Doors

nytimes.com

99 pointsjstreebin104 comments

I believe every fund has a clause like that in their rules, at least all the ones I've seen so far do: in case of exceptional lack of liquidity, or so many requests to get out of the fund that it would compromise the liquidity, the administrator is allowed to temporarily forbid getting out of the fund.

What these funds do is sort of similar to statistical multiplexing. They keep part of their assets as liquid stuff like cash or easy-to-sell government bonds, and the rest is longer-term stuff that takes more time and effort to convert into cash. Normally, requests to get out of the fund can use only the more liquid part, which will be gradually replenished from the less-liquid part. If there are too many people trying to get out at the same time, however, the more liquid part can get depleted, and were it not for that rule, the fund would be forced to sell the less liquid part at a loss, to the detriment of the remaining holders.

You're basically describing a bank run, or a run on any institution whose business it is to make investments in relatively illiquid assets, earn a return, and pay its investors a share of that return. The model relies on steady inflows and outflows.

> You're basically describing a bank run [...]

A bank run is a very special case, and while it might have similarities, it pays to be cautious when drawing comparisons.

Bank runs are special because of the fractional reserve banking system.

(Usually its at this point that someone launches into a tirade vaguely conspiracy-theory-ish about fractional reserve banking system, and complains that money is debt, but I grok it)

Fractional reserve banking is a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties.

Meaning, rather than let the cash sit in a vault, the bank is allowed to loan that money out to other people. If everyone wanted their money back, the bank would not be able to fulfill the request until they have recalled all those loans or perhaps sold the loans to other banks.

In general, loans are not able to be "recalled".

Nope. You could have a full reserve banking system and lend out all deposits.

BoE has some news for you:

https://bankunderground.co.uk/2015/06/30/banks-are-not-inter...

In a similar vein: the generally awesome Matt Levine has an article about how a bank with perfectly matched assets and liabilities would look like.

http://www.bloomberg.com/view/articles/2014-08-27/lending-cl...

Here's the 30 second summary:

Lending club is an entity that bears no risk because it simply matches capitalized lenders with borrowers in the present. It matches supply and demand right now.

A bank is an entity that bears risk because it matches borrowers with lenders in the future - meaning that the borrower might simply be lending to his or her future self. The bank is willing to spread that risk among all of its shareholders, and is usually backed up by a government agency to provide that service.

Maybe in theory.

But in practice they have

1) operational risk - insofar as they are the middle-man and so are exposed to investors suing them when the loans go south

2) Implicit credit risk - in that if their loans blow up the losses suffered by their levered investors will likely prevent them from coming back to the market place to 'roll the loans'

3) Explicit credit risk - in that they have invested capital in a subsidiary HF (Cirrix) which buys their loans and is on the hook for the losses (which could flow up to the parent)

http://www.inc.com/business-insider/inside-lending-club-scan... https://personalmoneyservice.com/lending-club-fraud/

Key passage:

"As a result, the company may need to use its own funds to purchase these loans in the coming months."

In other words, LendingClub is going to fundamentally shift its business model from taking no risk to taking on the risk of borrowers defaulting. The startup sold itself as simply a marketplace, connecting borrowers with investors, but now it is buying its own product. The equivalent would be Airbnb buying up loads of houses to list on its own platform, to keep it growing."

I still don't understand what makes banks special from any other institution that practices leveraging and fractional storage of their clients' assets? Like Comex or LBMA vaults.

FDIC insurance, the Federal Reserve, a whole bunch of other banking-specific laws...

That being said, there are good arguments for doing away with these, and regulating banks just like any other business.

Historically, eg Canada and Australia had good experiences with that setup. They had a more stable and advanced banking system in the relevant times (around 19th century-ish, I think), than the much more invasively regulated US at the time.

It's pretty similar. The bank has some cash on hand, and the rest sits in less liquid assets (like loans).

The fund has some cash around, and the rest sits in less liquid assets, too.

Does SPIC insurance cover losses from gated funds the same way FDIC insurance protects depositors?

Don't think so. Though they did have bank runs before government backed deposit insurance was a thing. (And I think not all countries do deposit insurance. But most major rich economies do.)

As an aside: there's strong pressure to cover losses from money market funds. (Usually on the sponsors of the fund, but I think there was a government bailout recently?) Even though those funds don't have a formal guarantee. But they are supposed to be liquid.

http://www.finra.org/investors/alerts/treasurys-guarantee-pr... goes into depth about money market account versus money market fund insurance.

"A money market fund is said to "break the buck" when its NAV falls below $1.00 per share. In the nearly 40-year history of money market mutual funds, this has happened on only two occasions—in 1994, when a fund lost approximately four cents on the dollar, and in September 2008, when the NAVs of money market funds issued by The Reserve Fund fell below $1.00.

Typically, there has been an expectation that when a money market fund reaches a point where it might break the buck, the investment management firm that sponsors the fund will take action to infuse the fund with cash so that the fund can maintain a stable NAV of $1.00 per share. Most money market funds in the U.S. are sponsored by large financial institutions that may provide assistance in the case of instability."

> It's pretty similar. The bank has some cash on hand, and the rest sits in less liquid assets (like loans).

That model is far too simplistic. And for most intents and purposes, especially when talking about bank runs, it fails rather badly.

I'll give the following explanation. Its going to sound like a huge scam, a ponzi scheme, a hugely irrational method, but in actual fact it makes a lot of sense for reasons that I'm not intelligent enough to put into words. But, its a rather elegant way of controlling the money supply.

So....

Imagine that I start a bank called Humber Necks Bank. We start with 0 customers.

Then Adam comes in and deposits $400.

The Ben comes in and asks for a loan of $200. We give him half of the money we got from Adam. Ben deposits this $200 in the bank.

The Charlie comes in and asks for a loan of $100. We give him half of the money we got from Ben. Charlie deposits this $100 in the bank.

The David comes in and asks for a loan of $50. We give him half of the money we got from Charlie. David deposits this $50 in the bank.

Then all of a sudden Adam, Ben, Charlie and David want to buy a bunch of in-game items on Pokemon go.

Adam will come in and ask for $400, Ben will come in and ask for $200, Charlie will come in and ask for $100, and David will come in and ask for $50.

That's a huge problem, because all I actually have is $400 (that Adam originally deposited).

You are describing fractional reserve banking. What do you want to say?

(And in practice, what you describe would apply only if we used eg gold as money. In a fiat currency system banks are even weirder.)

Although this is indeed how mutual funds work, there are other models:

https://en.wikipedia.org/wiki/Closed-end_fund

Can't be redeemed, can only be sold on the open market to a new buyer - e.g., ADX.

https://en.wikipedia.org/wiki/Exchange-traded_fund

Can only be redeemed for the underlying basket of stock (not cash), so the administrator doesn't have any liquidity problems to contend with - e.g., SPY.

Are these better, or worse than the mutual fund model? It's hard to say - with the closed-end fund setup, it's likely that they'd just end up with a deep discount to their nominal asset value in times of selling pressure, but at least you can still get out if you need to, and it creates a good buying opportunity for those with spare cash in tough times.

Even ETFs can have similar issues to mutual funds when the underlying asset is illiquid. ETFs will trade at an immense discount as the fund is sold faster than the underlying can be shorted. This happened to $JNK recently.

How long did that last? Longer than a day?

(Seems like a huge arbitrage opportunity, otherwise.)

It's not really accurate to call it arbitrage if you can't simultaneously short the underlying. You'll be looking at something (imo) not unlike pin risk. And just like pin risk...well, it's risky.

JNK wasn't as bad as I remember, according to the stats on Morningstar it had a discount of 1.15% at the worst.

I meant in a more general sense: it's closer to something uncertain like statistical arbitrage.

Thanks for looking up the numbers. 1.15% seems entirely reasonable compared to having your money locked up.

Yikes, that's brutal... one more reason to use ETFs I guess.

No, it's a reason not to panic-sell when there is fear mongering. Or better yet stay out of equities in the first place if you're worried about the value of your fund ever declining.

Am I misunderstanding this line:

"So far, the numbers are small enough. Of the 35 billion pounds, or $45 billion, invested in these funds, just under £20 billion has been affected."

What? More than half? And that's considered insignificantly small?

"These types of direct property funds — where the fund itself owns the building or property outright — represent a small piece of the mutual fund world.

Yet they have accounted for a growing share of investment in commercial real estate in Britain in recent years. According to a recent Bank of England report, these funds have about $46 billion in assets under management, representing 7 percent of investment in the British market." http://www.nytimes.com/2016/07/07/business/dealbook/3-more-p... the linked article.

So it seems this is maybe 3 percent of the overall British mutual fund market, and a fairly exotic part.

Where "exotic" = "high risk".

These funds are far less liquid than most, because they're structured to offer a small amount of floating capital to cover normal withdrawals, and a much larger pool of highly illiquid capital trapped in high-value commercial properties which can take months or years to sell.

So these are among the riskiest of all funds.

They're a very niche interest for experienced investors. Historically they've offered much higher returns than the market average, but clearly that's over now.

The situation isn't quite analogous to a bank run, because these funds are very peripheral and not structural.

But a bank run isn't impossible. The UK desperately needs a renegotiated trade agreement with the EU to clarify the UK's position - and that's not going to happen any time soon.

As one US investor said, no one in their right mind is going to go anywhere near the British economy until this is settled.

Hmm, it seems like a closed (and perhaps exchanged traded) fund holding the same assets would be superior to this kind of property fund?

If you want out, someone else has to take the property off you. Might as well do that via the exchanges, instead of letting some fund managers do it.

Or what am I missing?

Superior in what sense? When you invest in a fund with liquidity constraints you get paid in higher returns (an "illiquidity premium"). This was known by investors going in.

ETFs don't just magically make everything liquid without costs

Exactly. The ETFs just make the liquidity issues public on the market. For the fund, you'd be paying some managers to buy and sell stuff whenever enough people/money leaves or enters the fund.

    They're a very niche interest for experienced investors.

Experienced investors who are crowding for the doors based on the ups & downs of the market? Sounds pretty amateur to me.

It's possible that the first part is a typo and should be trillion?

Total global wealth is $250 trillion. British mutual funds can't be one-fifth of it, no matter how well invested.

Thanks for the reality check. aab0 seems to have the right of it, they cite a different article that goes into more detail about the funds in question http://www.nytimes.com/2016/07/07/business/dealbook/3-more-p...

edit: I'm still wrong, but it seems British mutual funds are an appreciable fraction of total global wealth (https://en.wikipedia.org/wiki/List_of_institutional_investor...)

double ninja edit: that's not right. I don't really understand what the figures on that page are supposed to represent... anyone want to try clearing it up for me?

I will clear it up for you: The numbers on that page are meaningless and misleading.

Firstly, the AUM column in the table doesn't represent anything. It overstates their _global_ AUM by 2 to 20 times for the companies I checked.

Secondly, this is by no means an exhaustive list of institutional investors in the UK. There are, well, I don't know but there are a huge number of small nameless investors sitting in the UK investing private funds globally, that are not and never will be on this list and whose assets will never be known, only estimated.

Interesting. Where is that number from?

I can imagine it comes with a ton of caveats. I don't think it's easy to put eg a value on towns or entire countries.

(It's a shame we no longer see trades in sovereignty to observe prices from, eg like the Louisiana or Alaska purchase. But the wealth is still there.)

You do know that City of London (separate entity from London) is the Financial Capital of the world (a clear cut above New York or Hong Kong)? 1/5 sounds correct to me, if maybe even a bit too low. You completely underestimate the amount of global investors that would choose British Mutual Funds for their portfolio on account of the above fact.

I'm familiar with the moniker. I don't contest it. I still don't believe it represents 20% of global wealth. For one thing, if 20 trillion GBP, twice the U.S. GDP, had left the global economy in a week's time, we wouldn't even need to argue the point. It would be the only story on the news.

I think the article meant the overall numbers are insignificant, as opposed to it being insignificant as a percentage of the actual funds.

That makes no sense. Tens of billions of pounds is significant by any standard. Has to be an error here.

It's relatively insignificant when compared against the rest of the mutual fund complex.

Reminiscent of the 2007 BNP Paribas suspensions that were some of the first indications of systemic failure:

http://www.nytimes.com/2007/08/09/business/worldbusiness/09i...

We are due for another credit heart attack. Private debt is too large (see Steve Keen's work) and there is no stomach for fixing it. Most economists don't recognize that that's the problem.

"The Big Short" Scion Fund managers restricted withdrawals, too.

[ http://www.nytimes.com/2007/03/09/business/09insider.html ]

Either way, chaos created opportunity and Scion investors might feel lucky that they were locked in the castle.

The subprime mortgage market finally imploded causing the Great Recession.

If you are confident of credit crisis, perhaps you can do your own shorting.

I'm fairly confident of one but, of course, timing is difficult and carry costs of short positions are high (they nearly killed Scion) so I prefer to simply wait out the market.

This seems to me very analogous to preventing a run on banks. Traditionally retail banks would invest their depositors' savings in real estate by financing mortgages. Indeed - in England many banks are still called "building societies".

Depositors are in principle able to get their money back at any time, but this is possible only because a small fraction will want to at any one time.

But when there's a "run on the banks" in a financial crisis, banks can't satisfy the withdrawal demands of every depositor simultaneously - except through distressed sales that only exacerbate the problem. Governments sometimes step in to call a "bank holiday" until the panic subsides.

The situation, down to the main class of assets held (real estate) and the liquidity promised to creditors, seems to be pretty much exactly the same as at the retail level. That being the case, this seems to be the prudent move.

My understanding is that the British building society is more akin to a credit union, being owned by its members, than a bank. Is that not the case?

I was more speaking to the origin of the term (as in, a society of people pooling their money to build buildings); not how it's used today. You may very well be correct and that would make sense.

Many building societies became banks over the last couple of decades. However, some are still mutually owned, such as the Narionwide and the Co-op.

>This seems to me very analogous to preventing a run on banks. Traditionally retail banks would invest their depositors' savings in real estate by financing mortgages. Indeed - in England many banks are still called "building societies".

That's not really how banking works in a fractional reserve system. The money banks lend to borrowers is created as part of the loan transaction, and in theory the bank retains enough money to pay off all depositors in the event of a bank run.

What do you mean by money? (Honestly.)

I don't think any bank carries lots of cash around these days to pay their depositors. So in case of a run, they have to give them some other kind of money.

Do you mean that they'll always have enough balance with the central bank?

Why do banks care about having deposits?

>What do you mean by money? (Honestly.)

By money I don't mean actual folding paper currency. These are all just numbers in computers - the central bank buys and sells currency as retail banks need it, but since that would take time most likely during a run they would give you a cashier's check which you could deposit somewhere else.

The amount of actual cash a bank branch has at a branch at any given time is just enough to handle their need for cash. Your typical US suburban retail bank starts the day with something like $20k in the vault. If I wanted to withdraw more than a few thousand bucks in cash I would have to give my bank advance notice.

There isn't actually a piece of currency somewhere for every outstanding dollar (or pound or euro or yen or whatever). If I'm reading this chart correctly there's something like 5 US dollars circulating in the economy for every dollar in currency.

http://www.tradingeconomics.com/united-states/money-supply-m...

The amount of outstanding currency is mostly irrelevant. If I deposit $100k at a bank using an electronic check the bank could turn around and buy $100k in currency from the Fed, but for the most part there isn't any reason to and all they do is change my balance in the computer.

>Why do banks care about having deposits?

Because in theory the amount of money they have in reserve dictates how much they can create in new loans. For example, if the reserve ratio is 9:1 and you deposit $10k, the bank can only loan out $9k on the basis of your deposit.

If too many people withdraw money that quarter the bank has to increase its reserves to match the ratio of outstanding loans by attracting more deposits, selling assets (like loans), or borrowing from other financial institutions (including the central bank).

The reserve ratio is set by the government, and it's one of those knobs central bankers can turn to affect the economy -when they want to stimulate the economy they can increase the reserve ratio, which allows banks to make more loans. If they want to slow things down a bit they can decrease the ratio, which makes it harder for banks to make loans.

This video, while a bit on the melodramatic side, actually explains basic banking reasonably well:

https://www.youtube.com/watch?v=jqvKjsIxT_8

Thanks for the explanation. That's similar to what I've been understanding about banking. I think I misjudged your simplification in the grandfather comment (https://news.ycombinator.com/item?id=12053254).

Rando banks are not empowered to create money.

Actually, that's exactly what happens when you take out a loan. It just doesn't look like money creation because everything evens out in the bookkeeping.

I think there's a semantic gap here. Can a bank with no depositors originate a loan?

No, it can't. They definitely have rules to follow, but that doesn't mean they're not creating money.

Let me ask you this. Let's say you have a bubble and the economy grows to twice is pre-bubble size. What are people worried about - inflation or deflation? When an economy grows, shouldn't deflation (in this case meaning a drop in price for the same items) be the problem?

You're confusing different definitions of the "money".

In theory, they retain enough _assets_ to pay off their creditors, but not enough _cash_. In the event of a bank run they'd have to be handing over their stake in mortgages and other debt that hasn't yet been paid off. But of course these are illiquid, and the creditors wouldn't accept that in general.

In the vocabulary of money supply, you're confusing M0 and M1.

The M0/M1 distinction is irrelevant - banks buy cash from and sell cash to the central bank all the time based on how much they need. Banks borrow against assets all the time, and during a run that's what they'd do.

"Illiquid" is just a word for little people as long as the bank is solvent.

Correct me if I am wrong, but isn't the "extreme circumstances" clause the same one used by Michael Burry prior to the 2008 crash (detailed in The Big Short)?

I don't think it's only British funds with this kind of language. It seems like standard boilerplate a lawyer would insert into the documents as a catch-all for anything unexpected (and misuse of it would be addressed with litigation)

> I don't think it's only British funds with this kind of language. It seems like standard boilerplate a lawyer would insert into the documents as a catch-all for anything unexpected (and misuse of it would be addressed with litigation)

Yes, this kind of clause can be found elsewhere. The ones I'm most familiar with are Brazilian funds, and randomly picking one from a major bank, the rest of the rule for it is: if the fund stays closed for more than 5 days, the manager has 15 days to do a vote among the holders, which can then replace the manager, reopen the fund, keep it closed, pay in assets instead of cash, split the fund, or even liquidate it. So any misuse of this clause would probably lead at least to the manager losing control over the fund.

Locking the doors is always a risky proposition. On the one hand it avoids fire sales, on the other it makes other investors nervous. Great scene in "its a wonderful life" when their was a run on the Bailey Building and Loan where George Bailey (James Stewart) explains the "60 days" rule. And the people who "sold their shares" for 50 cents on the dollar to the evil banker across the street.

I was thinking of the scene in Mary Poppins regarding the tuppence: https://youtu.be/lfP8__wl-_4

“At some point you have to wonder what happens if all these investors decide to go home.”

Asset prices decline. Interest rates become attractive. New investors come in. Money under the mattress doesn't give much of a return.

Unless the central bank doesn't print enough money, and we end in a deflation. Then money under the mattress gives real returns at no nominal risk.

And people in the UK get to have a reason to work again as land prices fall back in line with local wages.

Hooray. Speculators: go home. Of course we still need to put our parasitic banking industry into line but it's a start.

> Speculators: go home.

I imagine they know how to go short as well as long.

Really? I think most land speculators are pretty unsophisticated. How are they going to go short? Short UK house builders? Already dropped. Hedge GBP? Already dropped. Most are holding the baby now.

A bit of light relief on this subject from South Park:

https://www.youtube.com/watch?v=-DT7bX-B1Mg

The Brexit will never happen, for 2 reasons.

1) The EU is not allowing the UK any unofficial negotiations, so they have no idea how any of these economic negotiations will go. The UK government is scared to pull the trigger and no one in power wants to be the one to do it.

2) The UK needs free trade with the EU. If they want free trade, they also have to agree to free movement of labor. Stopping free movement of the labor was one of the core reasons the Brexit passed.

But if they don't go through with it, the voters will be pissed that they are breaking promises and anti democratic, etc, and vote them out. It's my understanding that conservatives are over represented in Parliament in the UK.

You can have free trade without limitless immigration. Many countries do. I don't know where you get that idea.

I'm sure UK can have free trade with Japan without any immigration. Good luck arranging that (free trade w/o immigration) with the rest of EU.

I believe the EU has free trade deals with Australia and Canada, without unrestricted immigration. Those are both former UK colonies that are similar to the UK. I'm not sure why you believe the EU is anti-trade. In fact promoting free trade seems to be it's main purpose.

Label it whatever you want, but I believe the EU is anti-(trade with UK without freedom of movement) because they publicly said so.

http://www.bbc.com/news/world-europe-36659900

> "Any agreement, which will be concluded with the UK as a third country, will have to be based on a balance of rights and obligations. Access to the single market requires acceptance of all four freedoms."

Are you saying that they're bluffing? (Well, that's possible, I guess.)

Well a single EU leader said that, I don't know if the opinion is unanimous.

Regardless, I suspect they won't do it because it would be irrational. Of course they have every incentive to make threats. But actually going through with them would hurt them just as much as the UK. Trade is a mutual benefit after all.

Anyway it just strikes me as mean-spirited. I doubt the EU leaders really care about immigration that strongly. They are also holding the UK to a different standard than other non-EU countries, and there is no justification for that.

I'll believe their serious if they start demanding the US, Australia, etc, open their borders or lose trade. Good luck with that. Yet somehow they find it weird the UK doesn't want unrestricted immigration.

> They are also holding the UK to a different standard than other non-EU countries, and there is no justification for that.

If Amex offers $500 credit to any new card holder, and if I happen to have the card, cancel it, and immediately re-apply, chances are that Amex won't give me $500. In fact, if Amex did, it would be financially irresponsible to its shareholders.

You may not like it, but EU does not really need a justification to treat UK differently from Australia. The leaders of France and Germany are elected to represent the interest of French/German people, and if they believe that discouraging more countries from walking out is in the best interest of EU and their own people (now you might disagree, but they can surely believe that themselves), then they are morally obliged to act tough to UK.

> Anyway it just strikes me as mean-spirited. I doubt the EU leaders really care about immigration that strongly.

Freedom of movement of trade, people/labour, capital and services is the core founding principle of the EU - they care about it a lot.

> Regardless, I suspect they won't do it because it would be irrational.

If Britain is given a deal that allows them all of the benefits of EU membership without any of the perceived downsides, all other EU member states will want this better deal too. Giving the UK such a deal would cause a number of additional countries to leave the EU. Thus, it would be irrational for the EU to give the UK a deal which would lead to the eventual breakup of the EU.

> I believe the EU has free trade deals with Australia and Canada, without unrestricted immigration.

There are essentially three ways to trade with the EU: As a member state (Britain's current position, France, Germany, etc.), as a member of the EEA (Norway), or under WTO rules (Australia).

If the UK wants one of the first two options they will need to allow freedom of movement. If Australia (somehow) applied for membership of the EU or EEA it would need to allow freedom of movement for EU citizens.

Well, there's a fair chance now that Andrea Leadsom will become PM. And she's definitely crazy enough to do it, regardless of consequence.

Your second point is incorrect. There are plenty of trade agreements without free movement included. Indeed the EC (forerunner to the EU) was precisely free trade without free movement.

The first point is debatable. There is a lot of political power to be gained by the person who pulls the trigger if they do it succesfully. I think it is 50:50, but there is a lot of upside to be had if it is done well and with plenty of stability and adjustment time. Anyone in the Conservative party who refuses to pull the trigger will be subject to endless criticism and undermining from the significant base of people that wants it done.

I suspect that what will eventually happen with Brexit is Britain will negotiate enough free trade deals that it will remain part of the EU in all but name.

Problem is: if they want free trade with EU, they must accept free movement of labor; which was the main underlying problem which caused people to vote for Brexit. If they adopt free labor movement, the Brexit would have been for vain, and most Brexit supporters won't go for it.

You can negotiate plenty of labor movement just with some simple qualifications, like not having a criminal history, being an eu citizen for 5+ years, no access to welfare for 3 years, things like that. I think most brexit supporters would go for that. The opposition is not to immigration in general from what I understand, but to uncontrolled immigration with which the UK parliament has no control.

Modern visa granting can be done electronically like the U.S. ESTA and could easily be achieved with little disruption. It could also prove a handy earner for a small fee.

I think it is misrepresenting the majority of brexit supporters to say they don't want any immigration. All the ones I talked to just wanted to have a say, and the EU did not give them that.

Does the fine print say they are allowed to do this?

The article mentions that the managers are allowed to block withdrawals under 'exceptional circumstances' to protect those with a longer term investment outlook.

The book/movie "The Big Short" dramatizes this really nicely.

In that case the fund manager was portrayed as receiving threats of legal action when he refused to allow people to leave -- there was absolutely no explanatory context which allowed the audience to decide whether his actions represented merely a whim of the fund manager or a legally valid option.

Edit: My comment refers to the film.

You're speaking solely about the film. The book goes into great detail about this.

That is not true. In fact the book was very clear how this occurred; I would have to rewatch but I believe the movie also hints at this. I thought the book's discussion of side pocketing was one of the most revealing parts of book: Lewis did an excellent job at explaining the recourses available to money managers.

Here's two short paragraphs from page 145 (of my copy, anyway) of The Big Short:

=================

> One night, as Burry was complaining to his wife about the complete absence of long-term perspective in the financial markets, a thought struck him: His agreement with his investors gave him the right to keep their money if he had invested it "in securities for which there is no public market or that are not freely tradable." It was left to the manager to decide if there was a public market for a security. If Michael Burry thought there wasn't--for instance, if he thought a market was temporarily not functioning or somehow fraudulent--he was permitted to "side-pocket" an investment. That is, he could tell his investors that they couldn't have their money back until the bet he'd made with it had run its natural course. And so he did what seemed to him the only proper and logical thing to do: He side-pocketed his credit default swaps. The long list of investors eager to get their money back from him--a list that included his founding backer, Gotham Capital--received the news from him in a terse letter: He was locking up between 50 and 55 percent of their money. Burry followed this letter with his quarterly report, which he hoped might make everyone feel a bit better.

...

> Immediately, his partners at Gotham Capital threatened to sue him. They soon were joined by others, who began to organize themselves into a legal fighting force. What distinguished Gotham was that their leaders flew out from New York to San Jose and tried to bully Burry into giving them back the $100 million they had invested with him. In January 2006 Gotham's creator, Joel Greenblatt, had gone on television to promote a book and, when asked to name his favorite "value investors," had extolled the virtues of a rare talent named Mike Burry. Ten months later he traveled three thousand miles with his partner, John Petry, to tell Mike Burry he was a liar and to pressure him into abandoning the bet Burry viewed as the single shrewdest of his career. "If there was one moment I might have caved, that was it," said Burry. "Joel was like a godfather to me -a partner in my firm, the guy that 'discovered' me and backed me before anyone outside my family did. I respected him and looked up to him." Now, as Greenblatt told him no judge in any court of law would side with his decision to side pocket what was clearly a tradable security, whatever feelings Mike Burry had for him vanished. When Greenblatt asked to see a list of the subprime mortgage bonds Burry had bet against, Burry refused. From Greenblatt's point of view, he had given this guy $100 million and the guy was not only refusing to give it back but to even talk to him. And Greenblatt had a point. It was wildly unconventional to side-pocket an investment for which there was obviously a market. There was clearly some low price at which Michael Burry might bail out of his bet against the subprime mortgage bond market. To some meaningful number of his investors, it looked as if Burry simply did not want to accept the judgment of the marketplace: He'd made a bad bet and was failing to accept his loss. But to Burry, the judgment of the marketplace was fraudulent, and Joel Greenblatt didn't know what he was talking about. "It became clear to me that they still didn't understand the [credit default swap] positions," he said.

I've edited my comment to make it clear that by "The Big Short" I had understood that we were discussing the movie of that name.

It's probably safe to say that the editors/director of the movie knew what they were doing when they omitted any explanation of the possible side-pocket situation. The overall impression given is in keeping with the passages you've quoted.

No, the movie also includes it (though the specific words "side pocket" are not mentioned, it is clear that it was a legal option available to the fund manager). It's directly in the text of the e-mail that Burry types out to his investors. From the screenplay text[1]:

> Mike types an email. He is alone in the office with empty desks outside.

> "As you may know, our agreement allows me to take extraordinary measures when markets aren't functioning properly. I currently have reason to believe the mortgage bond market is fraudulent. So in order to protect investors from this fraudulent market I've decided to restrict investors’ withdrawals until further notice. Sincerely. Dr. Michael Burry."

> Mike breathes deep, and hits SEND.

[1]: http://www.paramountguilds.com/pdf/the-big-short.pdf

It's very annoying to look for the "fine print" if you don't know which funds they are. I looked around and found at http://uk.reuters.com/article/uk-britain-eu-property-idUKKCN... that some of these funds were:

- UK Property PAIF and PAIF feeder - Threadneedle UK Property Fund - Canlife Property and Canlife UK

Looking at the documents for first of these, it says that "The ACD may [...] temporarily suspend the issue, cancellation, sale and redemption of Shares in the Company where due to exceptional circumstances [...]", so yes, it seems to be allowed by the fine print. I haven't looked at the others, but they should be similar.

Not to be the token cryptocurrency shill in the thread, but Bitcoin and its derivatives are very useful in situations like this. It's impossible to stop or otherwise block Bitcoin transfers, so it enables, for better or worse, unrestricted capital movement.

Even if your BitCoin are held by an investment vehicle..?

Not true. These are hedge funds managing complex instruments, not just regular bank accounts. Your bitcoin wallet doesn't allow shorting for example.

Equivalent instruments built on blockchain technology would suffer from similar issues.

>These are hedge funds managing complex instruments.

How come it's only when it comes to matters of finance that people tell me things are too complex for me to understand, yet I am well capable of understanding the most convoluted of machinery and systems. My only conclusion is that they are needlessly complicated on purpose.

Complex meaning not able to be liquidated with a single bitcoin or any other currency transaction. This is a specific asset that the fund administrators are not allowing to be liquidated. If you used bitcoin to buy these assets they would still be held outside of the bitcoin system. Just like when you use dollars/pounds/etc to buy the asset the wealth is no longer held in dollars/pounds/etc. They would be at least one step removed from the currency regardless. You couldn't liquidate immediately even if you bought into the mutual fund with bitcoin. The mutual fund would never be held in pure bitcoin because there are multiple assets -- other stocks, bonds, etc (e.g. complex). Complex as in not simple. Not complex as in you wouldn't understand.

It's not particularly complicated. But if you invest in a real estate fund and want your money back, you can't walk into some random office and take "your" chair. If you invest in a gold mine, you can't go grab "your" shovel. Your interest is diffuse.

unrestricted.... except for that pesky 7 transactions per second restriction.

That's like saying cars are useless a hundred years ago because they were slower than horses.

Its more like saying horses are useless today because they can't go 60 mph for hundreds of miles.

It is also impossible to block you from moving cash you already have in your pocket. It is however very possible to refuse converting shares in a fund into real money, regardless of whether that money is cash or Bitcoin.

'multisig'

It's not clear that that's very relevant to this situation: the investors here aren't clearly being confronted with government capital controls, but apparently with an enforced delay in liquidating an asset (enforced by the private party that holds the asset on the investors' behalf). This isn't the U.K. government saying "no investors may withdraw money from the U.K.", but U.K. financial industry entities saying "we won't agree to sell your assets and let you redeem your holdings in cash quickly at this time".

It wouldn't help in this case, since from what I understand most of the value in these particular funds is locked up in real estate.

An example: you invest €1000 in one of these funds. It takes €900 of what you invested (keeping €100 in cash), pools it together with what other people invested in the fund, buys one floor of a building, and rents it to a company. What it receives in rent is what gives the fund its return (and might be reinvested in buying more floors).

So, it's not a simple question of doing a transfer. The fund has to sell the building floors, a process which can take many months. If it has 100 investors, and only 2 or 3 want to get out, it can use what it kept as cash and pay them quickly; if 50 want out, it won't have enough cash in hand.

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