Listed Fohfs face battle for survival

Numis Securities believes the listed multi-strategy fund of hedge funds sector is under pressure to survive following another year of disappointing returns in 2011.

The research firm had expec-ted a core of the bigger listed fund of hedge funds to survive the market turmoil but it now believes the whole sector may be under threat. It points out that more funds threw in the towel last year to go through managed wind-downs while others returned capital to shareholders through tender offers, redemptions and share buybacks.

Many of the listed hedge funds face continuation votes early this year, triggered by their discount exceeding 5 per cent over the previous year. Numis says these votes will be catalysts for corporate action, which could bring further investment opportunities for investors.

Numis says listed funds of hedge funds have been unable to attract new money due to lacklustre performance and competition from Ucits funds as a way for investors to gain exposure to mainstream long/short equity strategies. The firm says the only significant buyers have been value investors who have applied pressure on funds to return capital, a strategy that has been profitable for investors who bought at a discount.

Numis points out that this strategy can be time-consuming for funds with less liquid portfolios.

Head of investment companies research Charles Cade says: “We believe there are opportunities to exploit value in the lis-ted fund of hedge funds sector. However, buying a fund for potential wind-up is complicated by the illiquid nature of underlying portfolios, and may require holding illiquid and potentially unlisted assets over an extended realisation period.

“As a result, we favour large liquid funds of hedge funds which can return capital while retaining meaningful trading liquidity.”