About the only thing worse than learning you have been ripped off is feeling like the problem is never going to end.
It’s a nightmare being lived out by shareholders in the GL Beyond Income Fund, who have been in limbo ever since Daniel Thibeault, the fund’s founder and manager, was charged with fraud by the U.S. attorney’s office last December. Thibeault has been back in court since, but investors can’t get out of the fund, can’t be quite sure how much their shares are worth and can’t tell if any real help is on the way.
GL Beyond Income
is a smallish fund whose troubles have gone mostly unnoticed, but whose story is a cautionary tale for all investors, especially those who might be attracted to new ideas and slick thinking from small investment firms.
The story opens in 2003, when Thibeault, then a Harvard Business School student, started a company called Graduate Leverage to help students obtain loans to finance their education. Over time, Graduate Leverage diversified into other financial-advisory businesses, mainly targeted at grad students and yuppies.
Ultimately, that led to the formation of two mutual funds. GL Macro Performance opened at the end of 2012 and closed 19 months later with annualized losses of more than 32%, dead last among domestic managed-futures funds, according to Lipper Inc. The dissolution of the fund seems to end its story, even though there appear to be very real questions about whether the fund was managed within either prospectus guidelines or Securities and Exchange Commission rules governing diversification.
GL Beyond Income, which opened in 2013, is a “closed-end interval fund,” an arcane fund type that has restrictive rules for purchases and redemptions. Those rules never seem like a big deal when an investor is buying a fund, but they’re a huge issue right now, locking investors into this disaster.
Moreover, the fund was part of the murky world of “alternative investments,” which once meant anything other than stocks, bonds and cash but which today generally applies to strategies typically reserved for hedge funds, and tactics purporting to generate positive market returns in all conditions.
The Beyond Income fund was a “nontraditional bond fund,” but wasn’t really in the bond business so much as the making-loans-to-the-nouveau-riche business. Specifically, the fund held the paper on variable-rate, high-yield personal/consumer loans made mostly to young doctors, dentists, veterinarians “and other professionals from top institutions.”
In theory, these loans to high achievers are less susceptible to economic downturns than market-based investments. Package them into a fund with a yield of 10% and zero correlation to the stock market and you’ve got something pretty appealing.
In December, however, Thibeault was arrested, charged with using fund monies to issue fictitious loans; five days later, Thibeault — who had been released on $700,000 bail — was relieved of his duties as trustee and president of the fund. The Securities and Exchange Commission filed its own civil suit against Thibeault in January, saying he misappropriated $16 million of the fund’s money.
Thibeault was indicted on the criminal charges in February; he pleaded not guilty to all charges
While Thibeault was charged by the U.S. attorney’s office with just one count of fraud — one allegedly fake loan valued at nearly $300,000 — prosecutors were laying the groundwork for a broader grand-jury indictment, accounting for the millions of dollars gone missing.
Free on bail, Thibeault was charged with starting another financial-services business, violating the terms of his bail, which was revoked on April 20. Bail was reinstated on May 5, over the objections of the fund’s trustees, who noted in a letter that day to shareholders that they were “quite shocked by the decision, as it is our belief that Thibeault…remains a potential menace.” (I was unable to reach either Thibeault or the fund’s counsel for comment.)
The fund is being overseen by its trustees, each reportedly with at least $1 million of their own money tied up in it. One trustee resigned in mid-April.
Investors hear all the time that they want boards and management with skin in the game — money in the fund right there with shareholders — and the GL case shows why. It’s hard to imagine anyone without dollars in a fund like this working to resolve the situation and recover the assets.
It’s equally difficult to see how this case gets resolved without investors losing at least 40 percent of what they thought they had in the fund.
GL Beyond Income isn’t trading now; the last share price was $6.61, down from about $10 before the problems were uncovered.
The loans left in the portfolio are performing as initially expected, serviced by a firm brought in by trustees, but they were never expected to have performance that could make up for an alleged theft.
The fund could be deregistered, but that’s not much help to shareholders trying to recover. Civil litigation is on hold until the criminal case is resolved, and it has now been months without seeing any counts added to the fraud charges.
Shareholders are stuck in limbo, adding opportunity costs to the losses they’ll someday realize when the case is settled.
Be glad it hasn’t happened to you. A case this extreme is rare, but keep it in mind the next time you hear about an investment strategy that sounds so sweet that it might not be.
View more information: https://www.marketwatch.com/story/when-a-fund-purchase-goes-horribly-wrong-2015-05-18