The listed hedge fund sector looks set to contract as trusts face continuation votes and many are wound up, despite taking action to narrow their discounts.
All but one of the 32 listed hedge funds has had to take measures to narrow its discount since April 2009.
Last year listed hedge funds spent £318m buying back shares, and £1.7bn returning capital to shareholders in other ways, according to listed fund promoter Dexion Capital.
Of the trusts that saw their discount control mechanisms triggered, several faced a continuation vote. Some funds are now facing their second vote as the managers have been unable to address their discount to NAV.
Mark James, head of sales and research in Royal Bank of Scotland’s global banking and markets team, says discount mechanisms have chiefly involved shareholder votes on funds’ future.
Almost all continuation votes within the sector received at least 80% investor support, despite shares still trading 13% below net asset value on 7 May – equivalent to a £949m gap between average share price and NAV.
In all, 11 votes have occurred or are yet to come in 2010, some of which are second continuation votes. Others, such as CMA Global Hedge, Gottex Market Neutral Trust and HSBC Global Absolute, are winding down.
Robin Bowie, chairman of Dexion Capital, says funds’ boards acted quickly to address discounts, which has been crucial. However, James says the sector will contract further, despite this decisive action.
“We will end up with fewer companies that are liquid in the secondary market, giving access to institutional quality hedge fund managers,” he says.
“Listed hedge funds will gravitate towards more specialised mandates where categories cannot be wrapped in Ucits format, or towards more mainstream funds that deliver strong performance.”
Bowie says illiquid classes like infrastructure are well suited to closed-ended funds as capital is locked in. He says investors are concentrating too much on liquid strategies, in structures such as Ucits funds.
Some view Ucits, with its mandated weekly liquidity, as a direct threat to closed-ended vehicles.
However, there are signs of renaissance among listed funds.
Bluecrest Capital Management’s £458m AllBlue fund is seeking to raise over £100m through a share placing, after raising £101m in December.
