M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, May 31, 2007

The First U.S. Listed Hedge Fund (Sort of)

Man Group plc, the U.K. based hedge fund operator listed on the London Stock Exchange, has filed a registration statement for an initial public offering of what is being touted as the first U.S.-listed hedge fund.  According to the registration statement, the fund will be listed on the New York Stock Exchange and called the Man Dual Absolute Return Fund.  It will be organized as a closed-end management investment company.  The initial public offering price is $20.00 per common share with a minimum purchase in the offering of 100 common shares. 

The fund is being marketed as a public hedge fund and so, accordingly, the fund will seek  "risk-adjusted [positive] returns with minimal correlation to the returns of major global equity and bond  market indices" (i.e., it will be an alpha fund).  Between 80% and 85% of total managed assets will be devoted to a U.S. quantitative long/short equity strategy with the remainder largely invested in a managed futures program called AHL Core.

But, for those now salivating over the chance to invest in a U.S. based hedge fund, don't get too excited yet.  Since the fund will be making a public offering it will become subject to the Investment Company Act (ICA).  This will require the fund to operate in a markedly different manner than typical hedge funds:

  • Restricted Leverage.  Unlike normal hedge funds which use extensive leverage and borrowings, this fund will be limited by the ICA to borrowings of no more than 33 1/3% of the fund's total managed assets.
  • Restricted Hedging.  Hedge funds have their name because of their unrestricted use of hedging.  Yet, the ICA limits the use of derivatives and permits only covered hedging.
  • Restricted Liquidity.  Hedge funds typically permit redemptions on a quarterly to yearly basis.  This fund will be a closed-end fund and there will be no ability to redeem shares.  Like other closed-end funds, this one is accordingly likely to trade at a discount.
  • Fees.  Funds subject to the ICA are limited under federal law and NASD rules as to the fee they can charge.  But hedge funds typically charge the so-called two and twenty.  There is a two percent administration fee and a payment of twenty percent payment of profits over a hurdle rate to the fund manager.  The Man fund registration statement has the adviser management fee blank, but the fund will not be permitted under the ICA to charge a profit participation fee.  The result is that the administration fee will likely be higher than the two percent to compensate but total compensation to the fund manager significantly less.  While fund holders might at first blush be happy about this where would you, as a hedge fund adviser prefer to work? Consequently, the fund adviser may not be able to recruit the best talent. 

There are other differences that I won't go into here.  Ultimately, the ability of this fund to earn the extraordinary risk-adjusted positive returns that hedge funds have become known for is uncertain in light of these substantial differences.  Accordingly, this fund would be better termed the first hedge fund-lite offering in the United States.  But, until the SEC ends its hostility to hedge funds and reforms the ICA to permit their public listing, this is probably the closest to a real hedge fund U.S. retail investors can get.  Whether it will successfully earn those hoped for positive uncorrelated returns is another matter.    


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