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February 9, 2006
Exchange-traded hedge funds sprouting
In 2006, funds of hedge funds trading on exchanges will receive more allocations from pension plans and get included in the FTSE indexes, a new report predicts.
Mark James of ABN Amro Bank argues that the funds were until recently too small for institutions that want to make large allocations. Taking a big share of a fund's total assets typically violates pension investment rules and also can run counter to restrictions imposed by an exchange.
But now several funds of funds listed in London and Zurich each have assets of more than half a billion dollars. For instance, Dexion Absolute Ltd. sterling class assets are at US$608 million, and its sterling C share assets are an additional US$113 million.
"Given the benefits of the structure, and the familiarity of exchange-traded funds to trustees in particular, we expect more pension funds to start allocating in 2006," Mr. James wrote.
In the meantime, new products are in the works. Dexion Capital, the operator of three listed funds, is launching a new vehicle, Dexion Alpha Strategies Ltd., to be managed by RMF, part of Man Group plc. ABN Amro, an active player in this market, is the sponsor.
This fund is to allocate tactically to managers with the goal of taking advantage of asset classes that offer high profits at the time, such as energy in recent years. Funds of hedge funds in general have suffered from lackluster returns as moneymaking opportunities in long-established hedge fund strategies like convertible arbitrage were depleted.
A closed-end fund that trades on an exchange possesses a key advantage. The manager has a stable pool of money and can take advantage of potentially high-profit but illiquid investment opportunities without having to worry about redemptions.
At the same time, trading provides daily liquidity to investors at a known price. But the share price can diverge from net asset value. Some shares, like those of the existing Dexion funds, have traded at slight premiums on the London Exchange, but those on the Zurich exchange are typically at a discount.
Another new development is the listing of a single-strategy hedge fund on London's AIM market for small firms. RAB Special Situations Company Ltd. shares were floated on AIM in May 2005. Because this closed-end fund invests all its assets in the RAB special situations master fund (established in January 2003), it was not eligible for listing on the London Stock Exchange.
Mr. James of ABN Amro sees more single hedge funds following suit, as well as additional fund of hedge funds launches on the LSE.
He expects some of the larger exchange-traded hedge fund vehicles to be included in the FTSE indexes later in 2006, thereby attracting index trackers. That would add to the liquidity of this sector.
Total assets in hedge fund products trading on the London, Zurich and Toronto stock exchanges are at about US$5.6 billion, up from US$5 billion six months ago.
-HedgeWorld.com-
Posted by su at February 9, 2006 5:37 PM