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Dexion Trading unveils proposals for corporate reorganisation

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The board of London-listed fund of hedge funds Dexion Trading has finalised proposals to replace its previous investment adviser, FRM Investment Management, with Legg Mason subsidiary Perm

The board of London-listed fund of hedge funds Dexion Trading has finalised proposals to replace its previous investment adviser, FRM Investment Management, with Legg Mason subsidiary Permal from October 1.

The board is also asking Dexion Trading shareholders to approve a change the company’s investment objective to allow it to become a feeder fund to Permal FX, a directional trading fund of hedge funds that offers investors exposure to commodities. Permal FX was launched in February 1992 and had gross assets of about USD8.7bn at the end of June.

Dexion Trading has instructed FRM to sell off the fund’s current investments and reinvest them with Permal FX. The board decided in June to recommend a change in the fund’s management in a bid to resolve a significant and long-standing discount of the fund’s share price to net asset value, averaging 5.9 per cent between the beginning of this year and June 12.

Dexion Trading is making a tender offer for all its existing sterling-denominated shares at the final net asset value on September 28, less costs capped at 1.5 per cent of final NAV, but intends to seek additional capital totalling up to GBP200m from new and existing investors through an issue of shares.

Shareholders will vote on the Dexion board’s proposals at an extraordinary general meeting on September 5. The results of the tender offer will be announced two days later.

If a sufficient number of shareholders opt to liquidate their holdings rather than make the switch to a new manager, leaving less than GBP50 in capital, the Dexion board is expected to recommend that the company be wound up.

‘We believe that for the closed-end structure to be the vehicle of choice, the discount or premium to NAV must be strongly addressed,’ says Dexion Capital managing director Ana Haurie.

‘As an independent manager we feel that we are in a strong position to achieve this through a combination of aggressive performance management, effective marketing and share buy-backs. We trust that these steps prove our unique ability to take action to solve problems of share price underperformance in order to safeguard the interests of our investors.’

Permal FX achieved an average annualised return of 10.86 per cent between January 1996 and June 2007, compared with a return over the same period of 9.08 per cent for the MSCI total return World Index and of 4.95 per cent for the total return JP Morgan Global Government Bond Index.

Permal FX’s investment objective is to provide investment returns that have lower risk than traditional investment returns and, over time, to achieve above-market returns. The fund achieved average annual volatility of some 5.82 per cent between January 1996 and June this year.

The board says that while both Dexion Capital and Permal FX principally allocate to directional trading hedge funds, they have a different balance between discretionary and systematic managers. At the end of May around 50 per cent of the Dexion portfolio was invested with discretionary managers, compared with 41 per cent for Permal FX, while allocations to systematic managers were 34 and 33 per cent respectively.

Whereas the Dexion fund has historically had little dedicated exposure to commodity managers, Permal FX has invested in managers with long/short or long-bias exposure to various commodities sectors including energy and precious metals, both through equities and via listed futures and options.

‘Permal FX’s allocation to dedicated natural resource managers, has contributed significantly to [its] returns since the first such allocation in late 2003,’ the board says. With Dexion Trading currently invested with 20 underlying managers and Permal FX invested with 56 managers, Dexion also believes that there is less manager-specific risk in Permal FX’s portfolio.

‘Macro trading is a core strategy for us and we are pleased to offer it in Dexion Trading,’ says Permal senior executive officer Omar Kodmani. ‘Given the recent heightened volatility in markets, we can expect attractive trading opportunities to arise for macro managers, which makes the timing of the launch particularly attractive.’

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