With the mainstream markets looking increasingly vulnerable it could be a good time to increase your exposure to listed hedge funds. The sector is currently out of favour with the majority of the constituents available at a discount to net asset value (NAV).
The broker Numis has trading buy recommendations on two of these funds on account of the fact that they offer relative value at a time when value is hard to find. They are Boussard & Gavaudan Holdings – Euro (LON:BGHL) and Pershing Square Holdings (LON:PSH).
Numis says that BGHL has a strong track record, but is trading on a wide discount to NAV of 16%. It provides exposure to a Europe-focused multi-strategy fund that aims to take advantage of event-driven strategies and arbitrage opportunities in Continental Europe.
This sort of flexible mandate allows it to profit from lots of different relative value opportunities that are not dependent on the direction of the wider market. These include: merger arbitrage strategies, where they go long in the target company while short selling the acquirer; catalyst driven long/short strategies; and gamma trading that seeks to use derivatives to profit from significant dislocations in the financial markets like a crash.
The Euro share class has a market value of €584 million and has returned 39% in NAV terms over the last three years. Numis consider the 16% discount to be attractive, although they acknowledge that the fund has a low profile and there have been no share buybacks since February 2016, so there is no immediate reason why it should narrow.
At first glance Pershing Square looks like a very strange recommendation as the performance since its high profile launch in October 2014 has been really poor with the shares losing more than 40% of their value. The reason Numis have backed it is that the founder and CEO of the company behind it, Bill Ackman, has a strong long-term track record and if he can turn the fund around the discount of 23% should narrow considerably.
PSH aims to preserve capital and seek maximum long-term capital appreciation through a long/short portfolio of shares and bonds issued in the US and elsewhere. Ackman is an activist, contrarian investor and has put together an extremely concentrated portfolio with most of the fund invested in a handful of core positions.
At the end of March there were weightings of 10% or more in Restaurant Brands, Mondelez, Air Products, Chipotle Mexican Grill and Howard Hughes Corp, as well as an 8% short exposure to Herbalife. This sort of approach has the potential to generate extremely high returns, but the performance has been completely undermined by a disastrous investment in Valeant Pharmaceuticals that was sold after losing most of its value.
The listed hedge fund sector is one of the few areas of the markets that has the scope to withstand a major crash, although many of the constituents are yet to be tested in this sort of extreme scenario. Only time will tell if they are up to the task.