Editor’s Letter – July/August 2014

Issue 96

Originally published in the July/August 2014 issue

The exchange-listed closed-end hedge fund sector has in recent years been overshadowed by the growth first of UCITS hedge funds in the European Union and more lately ’40 Act funds in the United States. It sometimes seemed as if the London Stock Exchange-listed hedge fund sector was shrinking, due to a mixture of share buy-backs and several vehicles, particularly in the credit and fund of funds space, being wound down or liquidated and returning capital to investors. While UCITS and ’40 Act hedge funds now measure their assets in the hundreds of billions, exchange-listed hedge funds only add up to tens of billions – and the number of reinsurance-wrapped listed hedge fund vehicles still seems quite modest.

Could a high-profile launch revive interest in the sector? Bill Ackman’s Pershing Square is reportedly seeking to raise $4 billion for a new closed-end fund to be listed on the London Stock Exchange. Ackman’s performance in 2014 has already captured the headlines with returns reported in excess of 20%. The saga of the activist’s very public ongoing battle over Allergan has also been a regular source of newsflow and entertainment. If Ackman succeeds in his permanent capital raising target, the trust could secure membership of the UK’s FTSE 100 index, something that could help it to stay in the limelight.

Arguably, however, the acid test for this, and any other, CEF launches will be whether the vehicle can avoid trading at a discount to its net asset value. This year the discount versus NAV has almost disappeared on Dan Loeb’s Third Point Offshore Ltd trust, which floated in 2007, but back in 2012 the fund was at a 20% discount to NAV. Even today other listed hedge funds, such as Boussard and Gavaudan Holding Limited, continue to display discounts close to 20%.

Discounts are one risk for investors and the SEC is taking a closer look at “liquid alternatives”. Ever more intrusive regulation is feared to be choking off the births of new hedge funds. But our latest Tomorrow's Titans survey still finds plenty of promising start-ups. This biannual survey, sponsored by EY, has identified dozens of exciting hedge fund launches worldwide. This time, for the first time, the survey contains all new names. None of the fifty selected has chosen to start off with a “liquid alternatives” UCITS, ‘40 Act fund or exchange-listed closed-end fund; all of the funds are, to our knowledge, currently restricted to professional investors, such as pension funds. One of the spin-outs from SAC was partly seeded by UK pension funds, which were in general relatively late adopters of alternatives. It is heartening that some of the latest converts to hedge fund investing are confident enough to be day-one investors.