H2O Asset Management has corrected a series of errors it made when disclosing investments in illiquid bonds and has claimed it traded the bonds with a Belgian wealth manager that last week denied doing so.

In late August, the €22bn investment firm and London-based subsidiary of French investment bank Natixis, was forced by French regulators to temporarily suspend trading in a series of its funds, because of concerns over the valuations of investments in bonds linked to the businessman Lars Windhorst.

The Financial Times reported last week that H2O carried out hundreds of millions of euros of trades in these bonds in the year before regulators froze the funds, shuffling its exposure to this illiquid debt using a loose network of minor brokerages.

H2O has now revised the semi-annual report for its more than €900m Allegro fund. The update shows that it had under-reported the extent of its trading in these bonds and not previously disclosed two key counterparties.

According to the revised version, at the end of 2019, the fund had €218m of “buy and sell back transactions” outstanding in bonds related to Mr Windhorst, a German financier with a history of legal trouble. This equated to 13.5 per cent of Allegro’s then €1.6bn of net assets. It originally reported €191m of transactions.

The buy and sell back transactions have come under scrutiny because they allowed H2O to reclassify some of the illiquid bonds to place them outside its main portfolio holdings.

The Allegro report also initially said that it only carried out these trades via British brokerage Shard Capital, whose founder James Lewis has had a close working relationship with Mr Windhorst for more than a decade.

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However, in the revised report, two other counterparties are listed in these transactions: Brandon Hill Capital, a UK firm that mainly deals in the shares of mining companies, and a firm called Merit Capital in Belgium.

While H2O has disclosed trades with Merit in other filings, audited accounts from another fund indicated it was a UK business, although there is no such company as Merit Capital incorporated in the UK or licensed by the UK financial regulator.

Merit Capital in Belgium is a small wealth management firm, whose chairman Henry Gabay is a longtime associate of Mr Windhorst. Last week, Mr Gabay told the FT: “Merit Capital incorporated in Belgium has not traded with H2O.”

Separately, Merit’s chief executive Jan De Coninck told Belgian newspaper De Tijd last week that the firm was considering legal action over being named in H2O’s filings. While one of Merit’s own funds has itself been an investor in the H2O Allegro fund, Mr De Coninck told De Tijd that this investment was “marginal”.

H2O declined to comment. Merit Capital did not respond to requests for comment.

Allegro’s revised semi-annual report is dated July 23, a month before French regulators ordered the fund freeze, but H2O posted it on their website only at the end of last week, after the FT discovered the document online elsewhere and asked H2O to confirm its authenticity.

The asset manager revealed this month that Allegro could now have as much as 35 per cent of its funds invested in these illiquid assets — far larger than the firm indicated — after H2O struggled to close these trades this year.

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Allegro’s auditor KPMG last year disclosed that it broke the rules on open-ended funds, which are meant to allow investors to withdraw their cash daily, breaching risk limits when trading Windhorst-linked bonds.

Via Financial Times