1 June, FinEx announced, that there are no underlying assets left in its FXRB exchange-traded fund. The fund will cease to exist in the near future, at the same time, investors should not expect any payments.
I'll tell, what happened to the fund and what is the situation of others ETF FinEx.
What is FXRB and what happened to it
FXRB is an exchange traded fund (ETF), launched by FinEx back in February 2013. This fund consists of Eurobonds of large Russian companies, such as Gazprom and Lukoil.
The fund is the twin brother of FXRU, another FinEx ETF. In fact, these are not different funds., and different classes of shares of one fund with Eurobonds inside. They have the same composition, but there is a difference in the mechanism of work.
The difference between FXRB and FXRU is, that FXRB uses ruble hedging - it insures against changes in exchange rates. Normally it works like this: if the value of assets in the fund has not changed, but at the same time the dollar rose or fell, ruble price of FXRU will follow the dollar rate. And the price of FXRB will not change - just due to the hedge. That is, FXRB is a ruble asset, while FXRU is a currency.
For hedging, one-month swaps were used - derivatives. Their counterparties were investment banks.
Under normal conditions, the ruble yield of the FXRB should have been something like this: FXRU return in USD plus interest rate differential between Russia and the US minus hedging costs, due to which the FXRB commission 0,95% per year instead of 0,5% in FXRU.
In practice it turned out, that swaps can give a loss, which the fund will have to close at the expense of its assets.
At the end of February 2022, the ruble began to fall rapidly against the dollar, At the same time, Eurobonds of Russian companies began to fall in price. As FinEx explains, “the international segment of the Russian corporate Eurobond market practically ceased to exist against the backdrop of sanctions”, at the same time, the depreciation of the ruble led to significant hedge losses.
Oleg Yankelev from FinEx explained in a chat for investors, that the fund's counterparties - the largest investment banks - decided not to continue swap operations in the ruble-dollar pair and demanded immediate settlement of contracts. The fund was obliged to cover losses on swaps - and the only source for this was Eurobonds of Russian issuers, constituting the fund's assets.
The fund's investment manager had to sell Eurobonds from the fund's assets, to cover debt under currency hedging contracts. No assets left in FXRB, and all remaining Eurobonds now belong to the currency class of shares of the same Eurobond fund - that is, they are considered to be included in FXRU.
FinEx directly writes: FXRB fund will cease to exist in the near future, and investors should not expect any payouts on this asset.
What about other FinEx funds
FXRU Paired Fund Continues to Work. As FinEx points out, his assets are held by Citi, the fund receives incoming payments and reinvests them in money market instruments to maintain liquidity. FXRU is now 19% short-term US Treasury bills.
In the investment community, after studying the FinEx report, concerns began to be expressed, that FXRU could also suffer because of the situation with FXRB. As it turned out from the prospectus of the fund, liabilities are not divided between different classes of shares of the same fund, and FXRU and FXRB are one fund. And the prospectus points, that hedging in one class could adversely affect the value of assets in another.
As long as it's just a guess. FinEx promised to give more detailed answers about FXRB and FXRU. Hope, possible FXRU problems will also be sorted out there.
FXRB is not the only FinEx fund with ruble hedging. Here are other funds, where it was used, that is, there were two classes of shares of one fund - with and without hedge:
- FXMM is the ruble version of the FXTB fund, consisting of US Treasury bills.
- FXRW - ruble version of the FXWO fund, investing in shares of large companies 7 countries of the world.
- FXRD - ruble version of the FXFA fund, investing in "fallen angels" bonds, that is, the least risky segment of high-yield bonds of US companies. FXRD plans to pay dividends.
- FXIP - ruble version of the FXTP fund, consisting of US TIPS - treasury bonds linked to inflation.
FinEx reported, that ruble hedging brought losses to all hedge funds, when the ruble began to fall rapidly. The amount of the loss was not named.. But the securities in these funds did not fall as, as Eurobonds of Russian companies in FXRB and FXRU, so it is unlikely that something will happen to these funds, what happened to FXRB.
At the same time, ruble hedging does not work now, so said funds will work without hedge. Besides, FXRD will not pay dividends.
For funds, where there were no hedging options, none of this should affect. It's hard to be sure about anything right now. 100%, but, at least, Oleg Yankelev from FinEx stated, that now they do not see such risks.
In any case, FinEx funds are still not traded on the Moscow Exchange, what is related to the restrictions from Euroclear. Besides, fund market makers - foreign companies - cannot now fully trade on the Moscow Exchange.
How bad is this story?, except for the loss
Obvious negative at a loss, suffered by investors. The exact amount is unknown, but it is not less than 853 million rubles: this is the value of the fund's assets indicated in the information note from 2 June. Probably, this is the last value before liquidation of the assets, That, presumably, was at the very end of February or in March. But it may be so, that losses are measured in billions.
There are also less obvious things., which are very annoying.
Not very clear, why did it become known 1 June. After all, the fund suffered in the spring, most likely in March, when the ruble fell the most. Furthermore, the news about the situation with the FXRB was not a separate piece of news, and part of the message, mainly dedicated to calculating the value of assets of other funds.
Oleg Yankelev from FinEx reported 1 June, that “the fund is under European regulation, and public disclosure of any information is strictly regulated”.
The advertised reliability of ETFs with their European regulation did not help the situation.. Yes, hardly anyone expected, that such geopolitical and infrastructural risks are being realized. Nevertheless, the funds were positioned as a reliable investment option - at least bond funds.
Besides, was considered, that funds as a collection of assets cannot fail, - but in this case something similar happened. The fund has a debt under hedging contracts, which had to be covered at the expense of his greatly depreciated assets, - and as a result, the fund lost all assets.
About that, that currency hedging can lead to such consequences, there was no speech. In FinEx publications for ordinary investors, including a document on how a currency hedge works, I also didn't see any direct instructions., that hedging transactions create liabilities for the fund, that is debt.
Furthermore, the said document states: “because FXRB and FXMM are fully transparent UCITS funds, swap counterparties allow the fund not to make collateral for futures transactions and not risk its own funds”.
Vladimir Kreindel from FinEx explained 2 June, that this quote is about, that the counterparty's problems would not lead to fund losses, since the fund did not provide security. Unfortunately, the wording in the document could easily be perceived as “hedging does not add risk to assets” - but in practice it turned out differently.
I will note, what, maybe, this is the first time in the history of the ETF industry, when the fund went to zero due to currency hedging.
Unfortunately, all this undermines confidence in funds and forces one to overestimate the investment risks and properties of various instruments.
What should investors do
Nothing to do with investments in FXRB. Even if the fund were traded on the Moscow Exchange - and he, like other ETFs, not traded since the end of February, - the stock price of the fund would be zero. When the fund is liquidated, fund shares will disappear from portfolios.
So far it's not very clear, whether they will take into account Brokers loss from this automatically, when will the tax base of investors be calculated. This may depend on, how exactly will the write-off of FXRB shares from the accounts be organized.
In my opinion, what has been happening to the funds in recent months - the suspension of trading on the Moscow Exchange and the loss of FXRB assets - may require a review of the investment strategies of many investors. But what instruments to prefer instead of funds, if you decide to invest in other ways, depends on your goals, perceptions of risk and other factors.
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