H2o investment management carried out vast sums of euros of positions in illiquid bonds around before regulators froze its resources, shuffling its contact with this troublesome financial obligation through a loose community of minor brokerages.

The counterparties tend to be strange for a 22bn financial investment firm. they consist of entities with backlinks to lars windhorst, the questionable german businessman that h2os portfolio of hard-to-sell bonds are typical associated with. there's also a tiny lossmaking british vendor bank and a mysterious business, merit capital, that h2o will not identify.

H2o initiated these trades, known as purchase and sell right back deals, when you look at the wake of a financial occasions investigation in summer 2019, which revealed your investment supervisor held more than 1bn in bonds connected to mr windhorst, a flamboyant financier with a brief history of legal difficulty.

The ensuing furore led panicked investors to yank billions of euros from h2os funds, while the asset supervisor ended up being forced to write-down the value regarding the problematic securities by 60 percent, it stated recently.

Yet h2o was able to reassure its consumers towards bonds liquidity a few days following the fts preliminary report, when it revealed so it had was able to sell a big percentage of these typically thinly traded securities.

It has emerged that this purchase never in fact shut plus the asset supervisor had been trapped holding bonds many investors had deemed poisonous. but h2o this month unveiled it had found an artful answer: restructure the abortive disposal into buy and sell right back transactions.

Within these forms of investments, asset supervisors usually undertake top-notch and fluid securities, such as for instance government bonds, in return for offering short-term financial loans to their initial owner, which buys all of them right back at a later time.

In h2os situation, getting into these agreements allowed it to reclassify some of the troublesome illiquid bonds outside its primary portfolio holdings. crucially, this meant these securities were outside the scope of a 10 per cent limit on unlisted opportunities that applies to open-ended resources.

Matthew clark, an analyst at mediobanca, described this method to invest in accounting as creative.

The scale of h2os illiquid securities

Yet h2o breached various other principles with one of these investments. in september 2019, h2os adagio investment breached a threat limit on trades with an individual counterparty stemming from transactions with shard capital, a tiny london brokerage, whoever president james lewis has received a close working relationship with mr windhorst for longer than a decade.

Shard capital declined to touch upon its role in these trades, but formerly informed the ft so it acted under instruction as an execution-only broker. the best counterparty wasn't made general public.

By the end of 2019, h2os flagship multibonds investment had 680m of purchase and sell straight back transactions outstanding, representing 13.5 per cent of the web assets. these investments were split across three finance institutions shard, merit capital and brandon hill capital.

Although its investments with each of three companies were just below a 5 percent limit on contact with a single counterparty, h2o nevertheless finished up breaching danger limitations, which it stated ended up being because brandon hill was late settling a trade.

Brandon hill, located in london, defines itself as an all natural sources merchant lender. the company, without any significant record in bond trading and mainly assists tiny mining businesses raise equity capital, made a reduction based on its last published accounts for 2018 and its own auditor flagged prospective question about its ability to carry on as a going issue. brandon hill keeps a company relationship with shard capital, based on its internet site.

Brandon hill informed the ft it acted as an agent just in deals with h2o at all times within regulated permissions set because of the financial conduct authority.

Merit capital is much more mysterious. multibonds audited annual records make reference to a merit capital in the uk. yet there is absolutely no business with this name included in the uk, nor does any such company hold a licence with the countrys financial regulator.

Men and women familiar with trading into the windhorst-linked bonds said they comprehended the filings regarded merit capital in belgium, a little wealth administration firm, whoever president henry gabay is a longtime connect of mr windhorst.

Mr gabay ended up being arrested in late summer as an element of a german research into the cum-ex income tax arbitration scandal. he had been introduced on bail and has now perhaps not been faced with any criminal activity. he told the ft he had provided his complete assist with the german authorities within their queries and reiterated which he had no part in every tax fraud or any dividend arbitrage trading.

Mr gabays duet group obtained the then-struggling merit capital in 2018 from a small grouping of shareholders including jan tops, an old olympic gold medal winning equestrian, whose showjumping company mr windhorst recently dedicated to.

Resources managed by both merit and duet have also formerly invested in bonds or stocks pertaining to the german financier.

But mr gabay denied merit ended up being involved with the trades. merit capital included in belgium has not traded with h2o, the swiss-turkish financier told the financial instances, when asked about these fund filings.

On their commitment with mr windhorst, mr gabay stated that his duet group did business with more than 1,000 organizations. i have been in finance since 1992 and do have a very large system, he added.

H2o investment management couldn't respond to repeated demands for clarification from the counterpartys identification.

Accounts for h2os multibonds fund show that huge amounts of euros worth of windhorst-related bonds flowed inside and outside of the fund during the period of 2019. four of the top profile moves were in securities linked to the german financier bookkeeping for about 2.9bn worth of both expenditures and sales.

Trading of lars windhorst-related private securities accounted for simply 5.4 per cent of h2o multibonds total exchange amount in 2019, h2o said.

The fund supervisor added that all of its counterparties tend to be vetted and preapproved by h2os conformity, risk and agent selection divisions. h2o features acted in accordance with all rules and regulating needs regarding counterparties, the investment company stated.

A representative for lars windhorst stated: we're not aware of those transactions and they're not our issue.

Mr clark, the mediobanca analyst, said: i worry the seriousness of the inadequacies being uncovered at h2o will always be under-appreciated.