US mutual fund Putnam bets struggling malls will transform to survive, pitting it against hedge funds
The Boston-based mutual fund firm holds more than US$1 billion worth of derivatives tied to mortgages on shopping malls, office buildings and hotels
Putnam Investments has placed a large, concentrated bet that struggling US shopping malls can transform themselves even as key tenants shut stores or file for bankruptcy.
So far, it is winning – to the chagrin of hedge funds like Alder Hill Management that are on the other side of the bet.
Putnam, a Boston-based mutual fund firm, holds more than US$1 billion worth of derivatives tied to mortgages on shopping malls, office buildings and hotels, according to interviews and filings analysed by Reuters.
One way Putnam gains exposure to the mortgages is through the CMBX Series 6 Index, which references a basket of 25 BBB- rated commercial mortgage-backed securities. There are about 46 shopping malls linked to the index, whose key tenants – Sears Holdings and JC Penney Company – have been closing stores at a rapid clip.
Putnam has been selling protection on the CMBX, which means it is betting that the mortgages referenced in the index will not go bad. Investors buying protection, including Alder Hill, are betting there will be loan defaults and writedowns on the same properties.
Putnam funds receive payments from investors shorting the CMBX index but are on the hook to pay those investors if borrowers do not make adequate mortgage payments or if there is a loan writedown.