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Listed outlook improves

Numis Securities expects share buybacks, tender offers and potential wind-ups to produce a better outcome for listed fund of hedge fund investors in 2011.

The research firm says the listed sector failed to deliver last year, with returns averaging around 5 per cent, excluding funds that are being wound up.

It says most listed funds of hedge funds suffered losses in May to June last year and failed to protect capital over the period, resulting in low investor confidence.

According to Numis, investors have also been put off the sector by discount volatility, poor liquidity and high fees, causing discounts to net asset value to drift wider. It says persistently wide discounts will bring about continuation votes for some funds, which will put pressure on them to return capital to shareholders through share buybacks and tender offers. Numis says these events, along with wind-ups, are likely to provide investors with an exit above current market prices.

But the firm warns buying a fund for potential wind-up is complicated by illiquidity in the underlying portfolios. It says single-manager listed hedge funds that invest directly in highly liquid assets such as US treasuries have reasonable liquidity but funds of hedge funds have little control over liquidity in their underlying holdings, so they may contain funds with redemption terms that vary over a month, a year or even longer.

Numis analyst Ewan Lovett-Turner says: “Funds of hedge funds remain under pressure, with unexciting NAV performance and wide discounts. We believe a core of large liquid funds of hedge funds will survive, including Dexion absolute and Absolute return trust, but we expect smaller funds that have performed poorly or followed an undifferentiated strategy to struggle.”

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