A mutual fund that was focused on the most riskiest corners of the junk bond market blew up this week. When it happened it also blocked investors from getting their money back.

Third Avenue Focused Credit Fund invested in distressed debt of companies that were close to defaulting on their loans and also ones that already had.

The implosion is a very rare event that normally is not seen in the sleepy mutual fund industry and highlights the turmoil rippling through the riskiest parts of the bond market.

This event also raises questions about Third Avenue’s focus on extremely risky and difficult to trade assets was really appropriate given the fact that mutual funds promise investors the ability to take their money out whenever they wish. Many have said that it is irresponsible to run the fund in a manner that can’t meet redemptions.

The Third Avenue liquidation also spooked already-rattled investors. Many were left wondering if there are more ailing funds in the horizon. This was further enforced when the Dow tumbled more than 300 points on Friday.

Mutual fund blocks investors

Then Third Avenue Management told investors on Wednesday it is liquidating and blocking further redemptions after months of heavy losses and elevated requests from investors for their money back. The fund shrank from $2.1 billion in July to just $788 million on Thursday it is estimated.
Third Avenue said it will return a small portion of its assets to investors next week and then will focus on unwinding its investments. The fund anticipates it will take about a year or more to fully liquidate.
They say this is because the mutual fund doesn’t want to resort to fire-sale prices just to meet redemptions.
It blamed all its troubles on the fast pace of redemptions combined with the lack of liquidity in the fixed-income markets.
It’s important to understand this was not your run-of-the-mill mutual fund that invested in junk-rated bonds.