The Hedgeweek Interview: Finding success with listed funds of hedge funds: Robin Bowie, Dexion Capital plc
Dexion Capital plc has successfully completed the third major fund raising for its London-listed closed ended fund of hedge funds, Dexion Absolute Ltd. (DAB-AUM 240m GBP). Robin Bowie outlines Dexion Capital's strategy and plans for new products.
HW: What is Dexion Capital's core business?
RB: Our principal business is advising institutions on allocations to funds of hedge funds (FoHFs). FoHFs are a fast-growing sector of the alternative investment market, but data to evaluate them is not widely available. In addition, the choice of investment strategies and styles is enormous and thus requires financially savvy intelligent human resource to evaluate it.
We are FOHF experts, concentrating exclusively on this asset class since 2000. We aim to give institutional investors a clear view of the strengths and weaknesses of FoHF providers, their processes, resources and products, in what is normally an opaque world.
The essence of our approach is to first gain a full understanding of the investor's needs and objectives in participating in the absolute return arena. Our knowledge of the sector means we begin the process with a research brief that reflects the client's investment aims.
We then draw on our proprietary database, coupled with a thorough appraisal of fund managers' techniques and performance, to distinguish the truly excellent funds from the mediocre. We monitor and evaluate virtually the entire FoHF universe by tracking almost 1,500 funds on our in-house database. By matching the most appropriate fund of funds with the client's mandate, Dexion Capital offers a bespoke service to investors.
HW: What is the background to the launch of your listed FoHF, Dexion Absolute?
RB: The launch was driven by the requirements of two key client groups. The first of these is the life insurance sector. In 2002 we realised that if a life insurance company wanted to make an allocation to a FoHF, they needed do so in a format that allowed them to include it as an admissible asset for solvency purposes.
The closed ended structure proved to be the best for this purpose, and the biggest investors have been the UK life insurers CIS and Pearl.
The second group comprised UK-based private wealth management groups, who wanted a structure that allowed them to do two things, the first was to deal with CGT vs. income tax and the second was to have a dollar asset hedged into Sterling.
Their other concern was the potential discount arising from a closed ended vehicle.
HW: How did you deal with the requirements of these private wealth management groups?
RB: We built in two features, namely tax efficiency and currency hedging.
Dexion Absolute is domiciled in Guernsey and there is no tax payable by Dexion Absolute on income or capital gains in Guernsey.
It is a very tax efficient vehicle for UK investors; its closed end structure should ensure gains on disposal are subject to capital gains tax.
It also implements a currency hedging policy. USD currency exposure is consistently hedged back to Sterling through rolling monthly forward contracts - the hedge to Sterling currently has a positive effect on net asset value due to relative USD and Sterling interest rate differentials.
HW: What is the provision for managing the discount?
RB: We have put in place a rigorous discount floor mechanism - a continuation vote is proposed if, in the 12 months preceding Dexion Absolute's year-end, its shares have traded, on average, at a discount in excess of 5% of the average underlying NAV over the same period.
If the resolution is not passed, the directors are required to put forward a special resolution to wind-up or reconstruct Dexion Absolute - this requirement is based upon a defined test, and is not at the directors' discretion
However, the reality is that Dexion Absolute's ordinary shares have traded at a healthy average premium to NAV of 3.1% since inception.
HW: How did you select the Investment Advisor for Dexion Absolute?
RB: At Dexion Capital our business is knowledge-based, focusing on the FOHFs on the one hand, and on the investment requirements of our clients on the other.
There is a flaw in the level of access that private wealth managers have to the FoHF business - because their average level of allocations is lower than large institutional players, they often only gain access to the Tier 2 or Tier 3 FoHFs.
So we decided to short list four institutional-quality FoHF management groups and we allowed the core investors to help us make the final selection of the investment advisor, which was Chicago-based Harris Alternatives (part of the CDC IXIS Group).
HW: What is the fee structure of the fund?
RB: It levies a management fee of 1.5% per annum of total assets. 0.5% per annum rebated quarterly as trail commission to "qualifying" investors on primary issuance.
Its performance fee is 10% of gains, subject to a trigger of 3% per annum and high watermark.
The above fees are inclusive of Harris Alternatives - there is no double charging.
HW: What makes Dexion Absolute different to other products available to investors?
RB: The difference between this and other products is not only the quality of the structure and the quality of the investment adviser - Harris Alternatives - but the fact is we are building a business in this area and it is our long term plan to expand that business in terms of products and breadth of coverage internationally.
The problem with these closed-ended products previously has been that the relationship between investment adviser and investment bank has meant that all that the investment adviser wants is capital and all the investment bank wants is upfront fees from raising the capital - there is no long term alignment of interests in this transaction-based business model and the investors often do not get looked after.
In contrast, our business model assures the continuity of looking after and responding to investors' requirements.
HW: How has Dexion Absolute performed and how much has it raised to date?
RB: Since launch in December 2002, Dexion Absolute has grown to its current size of GBP 240 million in assets under management, making it the largest London-listed fund of hedge funds.
The fund has delivered an 11.4% annualised return since inception (14 out of 16 positive months) and 0.91% average monthly return.
HW: Do you have plans to extend Dexion Absolute's investor base outside the UK?
RB: Yes, we are planning to roll it out to Europe and possibly elsewhere.
HW: What's next for Dexion Capital?
RB: We currently have Dexion Absolute, the balanced product, and Dexion Equity Alternative, the hedged equity oriented product, and we have plans for a third product, which will be more of a portfolio diversifier. In other words it is likely to be a balanced portfolio but with an orientation towards trading, which will give it negative correlation to equity markets.
As with previous products, we will find the best manager for this product, which we plan to launch in November.
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