Retail market holds key to getting into ‘trophy hedge funds

Now, who would have thought it? Retail investors, second rate citizens for many hedge funds during and since the crunch, now hold the main key to access some of the world’s most sought-after managers.

Some of the best hedge managers have shut their open-ended funds – which institutional investors typically used to invest – but the door remains open to their closed ended investment trusts, which invest in the capped funds.

The investment trust route is the path retail investors typically use to access hedge fund talent.

Having such prized access questions the argument that retail investors could never invest with the $2trn industry’s most talented managers.

If you have spare €20 you can buy shares in listed trusts that have money in capped funds such as CQS ABS, and CQS Directional Opportunities, Bluecrest Capital Management’s BlueTrend, and Brevan Howard’s Master fund.

London-listed shares in BH Macro and BH Global will each give you indirect access to Brevan’s Master fund.

On the other hand, if you have a spare $10m and can show your strategic importance to Brevan Howard, you can still invest directly in their Master fund.

CQS has kindly reserved capacity in ABS and Directional Opportunities for further allocations from its listed CQS Diversified fund of funds.

And Bluecrest’s AllBlue listed fund of funds has money in BlueTrend, whose 43% returns in 2008 played a part in helping AllBlue post a positive return.

Other past highlights of funds capped include: CQS ABS made 179% in the two years to mid-2009, and 35.2% annualized since October 2006, investors say.

CQS Directional Opportunities made 23.9% a year since August 2005.

And BH Master made about 21% in 2008, as global shares tumbled about 43%.

That same year the Clive fund, held by the Altin listed fund of hedge funds, made about 43%. Paulson Advantage Plus, also one of Altin’s, made about 33% and, despite recent hiccups at Paulson & Co, it remains a prized holding.

About half the funds Altin holds are capped.

There is a second way of accessing locked funds – buying stakes on private markets such as the one Tullett Prebon organises.

Neil Campbell, Tullett Prebon’s head of alternative investments, says it has traded $1bn worth of stakes since the crunch.

This was often stressed stakes selling at discounts to NAV, but premia may become more prevalent as more funds close to new money but investors still want to get in.

One set of fund stakes still trading at far below par are those defrauded by Bernard Madoff. All that remains of some are legal claims on whatever is recoverable from his estate.

You could not sell such claims for love nor money shortly after Madoff’s arrest in December 2008.

But as trustee Irving Picard salvages money from investors who redeemed early; from legal actions against feeder funds into Madoff’s Ponzi scheme; and from fire sales of Madoff’s personal belongings, even those stakes have traded for up to 60% of face value.

Now, who would ever have thought that?

David Walker

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