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.