Relatively permanent

Date: Tuesday, December 12, 2006
Author: Andrew Hill,

By listing hedge funds and funds of hedge funds, managers are often said to be gaining access to "permanent capital". This overstates the case. Without a listing, the money backing hedge funds is "temporary", in that investors may choose to withdraw it, albeit with long lead times and often with penalties. Listing makes sense because redemptions need not prompt managers to quit investments and themselves incur penalties.

But if you read the fine print, listed funds can be dissolved, or shareholders can vote to replace management, if the price falls more than 3 to 5 per cent below the fund's net asset value for a year or more. At the moment, Europe's listed hedge fund products trade at an average discount to NAV of 0.8 per cent. From investors' point of view, it is right that these listed companies are subject to governance controls and regulatory scrutiny. Being able to check the value of an investment every day, rather than waiting for monthly or quarterly updates, as is the case with many non-listed hedge fund products, is also an advantage.

But some investors would prefer their fund managers to spend all their time investing, rather than taking calls from analysts about fluctuations in NAV or speaking at annual meetings. For investors, will more information and greater liquidity offset the potential distraction of star managers? For managers, will the security of funds provided by a listing offset the disadvantages of closer scrutiny?