Research

03/08/2006

Managers bow to investor pressure over hedge funds in search of ‘permanent capital’

 
LONDON: Hedge funds are looking to raise ‘permanent capital’ by listing on the London Stock Exchange (LSE), with almost $1bn in assets generated in two IPOs in the past two weeks.

On Monday, Goldman Sachs Dynamic Opportunities, a closed-ended fund of hedge funds, made its debut on the market, raising $507m. Goldman Sachs had originally predicted the IPO would generate between $200m and $400m, suggesting the firm had underestimated the appetite for the new stock.

The Goldman Sachs listing comes on the heels of a similar IPO by CMA Global Advisors. The Swiss hedge fund listed on the LSE last week, raising $402m. CMA is also a fund of funds, in which managers will invest no more than $10m across 42 chosen sub-managers working in various locations across a range of strategies.

The appeal of permanent capital is likely to increase among hedge funds, industry observers say. “I believe [CMA Advisors] is a very interesting offering that is effectively bridging regulatory, tax and liquidity issues and providing investors with exposure to an asset class. At the same time, it allows managers to have a longer- term approach to allocating assets to underlying managers, which is a healthy benefit to investors,” said Simone Borla, managing director at GAIM Advisors.

The Goldman Sachs and CMA IPOs have been widely seen as a way for retail investors to gain access to hedge funds, but it is more likely the shares will be taken up by institutions and high-net worth individuals. It is clear, however, that the continual need for liquidity is influencing hedge funds in their decision to list. Permanent capital gives the funds access to capital without the traditional fear of large redemptions from institutional investors.

Among other hedge funds expected to list is RAB Capital, which is likely to announce the move later this year. It is expected to be joined by other companies. Raising capital via the closed-ended fund listing route has, however, been attempted before, notably by HSBC Republic Investments and Dexion Capital, but growth was curtailed because of the poor performance of their shares.

“The only issue with these products is that often they traded at a discount to NAV,” said Borla. “But in the past few years substantial improvements have been made in that respect, and appropriate and effective measures have been adopted. I believe we will see more issues in the coming months, which I see as a positive development.”
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