As many as 140 Australian listed investment companies are trading at a discount to their net asset values, making them vulnerable to hedge funds who will push for their liquidation to make a profit.Funds such as London-based Laxey and Carrousel as well as Boston-based Weiss can see that about 80 Australian listed investment companies are trading at a discount of 20 per cent to their net asset value, says advisory firm Pottinger.
A hedge fund with leverage can quickly accumulate a significant shareholding of 5 or 10 per cent, call a shareholders meeting and push for the liquidation of the fund and potentially reap tens of millions of dollars in profit.
When hedge funds agitate for a liquidation of a fund “directors put their heads in the sand. As a result they lose the whole fund,”says Nicholas Gold, a senior advisor at Pottinger.
Listed investment companies represent about 12 per cent of the market value of the ASX at about $200 billion. The discount at which listed investment companies trade to their net asset value is about $20 billion, according to Pottinger.
“I can’t see $20 billion left on the table,” says Gold.
He “wouldn’t be surprised” over the next five years if as many as 40 listed investment companies may be required to consolidate or reconstruct after being confronted by hedge funds.
A fund that is likely to get attacked is one of a market value of between $200 million and $500 million that has stock available, charges high fees and has a comprehensible investment strategy.
Listed investment companies trade at a discount because fees may depress their net asset value. There are also “market inefficiencies” that depress funds’ net asset values, says Gold.
Still, if an investment manager is outperforming the market, an investor would expect the shares of the listed investment company to trade at a premium to net asset value.
More than 30 funds are trading at more than a 50 per cent discount to the net asset values, according to Pottinger.
“Funds not performing will be wound up,” says Gold.