01/06/2010 Author: Shannon Hawthorne

Discount pricing threatens confidence in listed funds

Listed hedge funds are set for another round of continuation votes as the sector continues to trade at a discount to net asset value (Nav).

Several listed funds, including BH Global, BlueCrest AllBlue Fund and Dexion Trading, triggered continuation votes last year, and while shareholders largely voted against share class closures, the sector is set for a second round of votes as investors in a number of funds, including Dexion Commodities, Absolute Return Trust and Cazenove Absolute Equity, look to make a decision on the funds’ futures.

Last month, Goldman Sachs Dynamic Opportunities witnessed a second continuation vote which saw the sterling share class pass, but the dollar and euro classes fail.

According to research conducted by RBS in May, two-thirds of share classes in the sector are priced at a discount in excess of 10%, with the average standing at 13% (see insight, p4). Only two listed funds, BHMacro and BlueCrest AllBlue Fund (£, $, €), are currently trading at a premium – 0.2%/2.7% and 5.5%/1.8% respectively.

While a failed continuation vote will mean the winding down of a fund, ongoing discounts have also seen increased allocations from private banks seeking to rebalance the portfolios of their underlying clients by buying or selling shares on the secondary market.

“The fact that discounts are prevalent is clearly an opportunity for investors coming into the sector who, as a consequence, can access good-quality hedge funds at a discount to Nav,” said Mark James of RBS Global Banking & Markets. “However, it does mean funds that are trading at a discount won’t be experiencing asset growth.”

Current investors are also expected to continue to support the sector and remain patient through the latest round of continuation votes.

“These votes are in the shareholders’ interests – they allow them to exercise their views on whether these companies should continue in their existing forms,” said James. “As such, I think this is something that they should continue to embrace.”