H2O Allegro continuously broke its target volatility range and weekly value at risk (VaR) limits in order to achieve its “spectacular” long-term returns, Morningstar has said in an analyst note as it reinstates a rating for the troubled fund.
The fund faced €600m in redemptions between 18 and 21 June after Morningstar suspended its rating for the fund on the back of a Financial Times article showing six H2O funds appeared to hold €1.4bn in bonds issued by financial vehicles linked to controversial German financier Lars Windhorst.
On Thursday, Morningstar reinstated a rating on the fund, downgrading it from bronze to neutral.
Morningstar director for fixed income strategies Mara Dobrescu said since March 2011 Allegro has topped its category with 16.5% annualised returns, driven by long positions in the US dollar and eurozone periphery debt.
“However, this stellar record has been achieved at the cost of higher risk than investors could have expected. The fund has continuously exceeded its prospectus target volatility range of 7%-12%, and weekly VaR limits have also been breached, as noted by the fund’s auditors on several occasions,” Dobrescu said.
The Morningstar note said it remained to be seen whether an audit announced by H2O parent firm would result in tangible results for investors.
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