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Ewan Lovett-Turner: Is there a future for listed hedge funds?
by Ewan Lovett-Turner on May 17, 2010 at 08:30
Now is the time for listed funds of hedge funds to prove themselves and deliver on their absolute return mandates.
Over the past week, concerns over the worsening European sovereign debt crisis have rocked global equity markets and volatility has spiked, with the VIX index more than doubling.
Many investors lost faith in listed hedge funds in 2008 when net asset values (NAVs) declined 20% and discounts widened in excess of 30%. Since then, NAV performance has recovered, though this has been during a period of strong equity markets. If the listed hedge funds can prove themselves by delivering steady NAV performance during the current volatile markets we believe there could be a re-emergence of demand.
What do investors want?
Over the past 18 months the listed hedge fund sector has been forced to return £2 billion of assets to shareholders through tenders and buybacks, while several funds have also open-ended or wound-up.
Even so, the sector continues to trade on an average discount of 10% which we believe is too wide for an asset class targeting low volatility returns.
We believe the key to narrowing discounts further is the stimulation of fresh demand and that the key attractions of listed hedge funds are:
• Trading liquidity: In theory, daily trading is one of the main attractions of the listed structure to institutions and private wealth managers. In practice, however, they have often struggled to trade at the market price in significant size. Trading activity is now concentrated in a small number of funds, such as BH Macro and Dexion Absolute, and funds under £100 million fall under the radar of many investors.
• Discount stability: Wide and volatile discounts are particularly unattractive to investors seeking low volatility absolute returns. NAV returns can be wiped out by adverse movements and the volatility of the share price is often far greater than the underlying portfolio.
• Consistent NAV returns: Hedge funds are rebuilding their records of protecting capital in weak markets, after the disappointment in the fourth quarter of 2008. Investors will expect consistent returns in the current period of volatile markets.
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