Recovery of Losses in Bond Funds Inflating Returns
Our securities attorneys are investigating bond funds that allegedly inflated returns to attract investments and win high ratings from Morningstar.
A recent study published by professors at the University of Stuttgart and the College of William and Mary finds that many start-up bond funds invest in bond securities (like mortgage-backed securities) in small “odd lots,” or increments of less than $1 million. These "odd lots" frequently trade at a discount to larger, “round lot” positions.
However, according to the study, some bond funds do not always apply those discounts when they mark the value of these odd-lot bonds. Instead, they allegedly mark the bonds at the higher round-lot price. Using those higher marks may falsely inflate the fund’s overall return because the bond bought at a discount suddenly is worth its full price.
The professors shared their preliminary findings with the Securities and Exchange Commission in 2016, and used Semper Capital Management LP’s MBS Total Return Fund as an example of this practice. According to the professors, odd lots accounted for nearly three-quarters of the MBS Total Return Fund’s portfolio at the end of its first three months.
The SEC then brought claims against Semper, alleging that it marked its discounted odd lots at the higher round-lot prices. Doing this, the SEC alleged, inflated the fund’s performance. According to the SEC, Semper failed to tell investors enough about the reasons for its impressive start. Semper and the SEC settled earlier this year, with Semper paying $500,000.
The professors have identified a dozen bond funds managing a combined $75 billion, all of which have launched since 2010, purchased large quantities of odd lots, and reported returns substantially greater than their benchmarks. Among them allegedly are the following funds: AlphaCentric Income Opportunities; Semper MBS Total Return; Deer Park Total Return Credit Fund; and the Performance True Strategic Bond Fund.
If you have suffered investment losses in any of these funds, or any other bond funds that were launched during the last decade, you may have a legal claim. Our securities attorneys at Morgan & Morgan’s Business Trial Group are here to help. Please contact us a 888.744.0142 for a free consultation.
We help investors recover their losses on a contingency basis. There are no upfront costs or hourly fees to hire us, and we are only paid if we successfully recover money for you. We have helped investors recover tens of millions of dollars of investment losses.