Charlemagne Capital, the newly re-branded Eastern Europe investment operation that was formerly part...
Charlemagne Capital, the newly re-branded Eastern Europe investment operation that was formerly part of Regent Pacific, is set to launch a closed-ended fund arbitrage vehicle, writes Robert Maharajh.
The Cayman-domiciled fund will aim to buy into closed ended funds trading at a discount to Net Asset Value. While Regent has operated within that strategy since 1991, this vehicle will, for the first time, attempt to hedge out market exposure and make money purely out of narrowing discounts.
Every long position held will have a 'mirror' short position, based on a trust's top 10 positions as well as index futures or swaps if appropriate.
The focus will be on funds that have a forthcoming shareholder's vote and the ability to buy or tender for shares, as well as a specific reason for open ending, such as poor performance or a large discount to NAV.
Varda Lotan, head of marketing at Charlemagne, said: 'For us to contemplate taking a position in a fund it must be trading at a wide discount of between 15% and 30%. There must be an ability to narrow that discount, and there must be an opportunity to hedge the fund's underlying equity risk.'
Once these criteria have been met, manager Carlos Horner will attempt to ensure that an efficient hedge for the fund can be managed, Lotan said. 'This stage of analysis will focus on the target's portfolio concentration, the regularity and accuracy of information on the portfolio, a low historical portfolio turnover, an ability to short sell the portfolio's principal holdings and the ability to short sell index futures or index swaps against remaining market exposure.'
Lotan also emphasizes that the fund will take a more 'benign' approach than Regent vehicles have used in the past, aiming wherever possible to work with the directors, management and shareholders to develop proposals for realizing value.
The investment universe is considerable, comprising around 1,000 potential targets, including over 500 New York listed funds, 120 offshore funds and over 300 London listed funds.
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