Contract Duration Mismatch

Ceri Shepherd

12/8/2021 1 min read

I feel a worrying trend that we have seen recently is contract duration mismatch primarily where a fund manager takes a position in an asset with a small public float or in a private position, using short term funding, or allowing investors immediate redemption upon request.

They have now bought something that is at best very illiquid, the market then takes a turn for the worse. The investors want there money back or the short term funding is repayable.

In both scenarios the fund manager is unable to comply, we have been seeing quite a lot of this recently Neil Woodford at the Woodford funds is a great example. He was investing in small companies with very limited floats, or who had not come to market yet, financed by his investors who had a profile that there money was immediately redeemable upon request. How can this be possible when you have used there money to purchase illiquidity? 

We have also seen a variation upon this theme in the UK energy market recently, where many energy supply companies were effectively purchasing within the spot market, then selling long duration contracts to their retail customers. Worked fine until the European Natural Gas price rose from approximately 15 Euros to 90 Euros per Mw within the space of 2 months. Then over 50% of all the energy companies within the UK ceased trading.

Both of the examples above are a contract durational mismatch 

At Trendinvestor this can never happen, because money is invested only into the S&P 500 and that is one of the most liquid markets in the world, if not they most liquid. If a customer requires money back, we simply raise cash instantly at the market.
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