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Dexion hedge fund on ‘edge of viability’ as assets shrink

Dexion hedge fund on ‘edge of viability’ as assets shrink

The future of the Dexion Trading hedge fund has been called into question after the triggering of a share buyback offer.

Structured as an investment trust that feeds into its parent Permal Macro Holdings fund, Dexion Trading’s discount control mechanism compels it to hold a redemption offer for up to 30% of its share capital at net asset value less costs if the shares trade on discount of 3% or more over any calendar quarter.

In the three months to 31 December 2013, the trust’s average discount was 3.37%. If the tender is fully taken up – a similar offer in November was heavily oversubscribed – Dexion Trading’s net assets stand to shrink from £93 million to £65 million.

‘It is positive that the board has adopted a strong stance on discount control, but another significant tender will shrink the fund to the edge of viability, in our view,’ said Ewan Lovett-Turner, associate director of investment companies research at Numis Securities.

Lovett-Turner noted that while the current discount was ‘modest’ at 2.7%, the fund’s recent performance has been ‘dull’. It has returned close to zero on a net asset value basis over the past three years, although its share price return has been 13% through the period.

‘Given the small size of the fund, we believe the managers need to deliver stronger performance to justify the fund’s existence,’ said Lovett-Turner. He acknowledged, though, that Dexion Trading’s strategy was ‘highly liquid relative to most listed funds of hedge funds’, with monthly dealing in its master fund.

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