Are hedge fund listings past their sell-by date?
Investors will still want access to the best-run funds.
The IPO of Third Point’s feeder fund on the London Stock Exchange has got tongues wagging about whether or not the hedge fund listing phenomenon has run its course.
Hedge fund darling Dan Loeb listed the fund in July, raising $525 million. The stated target had been $690 million, and many in the industry have been quick to point to the listing as a failure. One theory being bandied about is that sub-prime woes are deterring investors; other market observers are claiming that the novelty value of hedge fund listings has worn off and investors are losing interest.
Both are reasonable explanations for the fund missing the stated target, but it’s incorrect to call the Third Point IPO a failure. After all, stated targets are rarely what the manager is hoping to raise. Hedge funds are often urged to list in their prospectuses a higher than necessary target in order to keep investors happy in case interest is much higher than expected and shareholders find their positions diluted. The Brevan Howard listing of its BH Macro fund is a prime example. It raised €770 million, but had put a maximum target of €1.5 billion in its marketing briefs. The market was quick to call it a failure but the managers were more than happy with the amount raised and the resulting diversification of their investor base. What is more, BH Macro has been performing well. Its net asset value per share is up more than 3% since the listing in March.
However, there is some value in the argument that as time goes on, hedge fund listings might be less successful in raising capital. Their appeal to investors is clearly that they offer exposure to funds that are hard to access directly or have closed to new capital. If 20 or so funds are listed, this attraction will obviously diminish. Investors have a selection of funds to access. That said, in the case of the Third Points and Brevan Howards of this world, it is hard to see that investors would not want a piece of the pie. These are hugely successful funds, with solid returns, run by highly regarded management teams. As investors increase their hedge fund allocations, such funds should have no problem raising capital in the public markets. If they raise $120 million less than their maximum targets, as Third Point did, it isn’t the end of the world.