Hedge funds are increasingly eyeing opportunities in the UK’s £200bn investment trust sector, capitalising on its struggle with investor disinterest and competition from more cost-effective alternatives, according to a report by the Financial Times.
These investment trusts, deeply rooted in the UK equity markets and dating back to the Victorian era, now face a widening gap between their share prices and the underlying asset values. Compounded by their worst year for raising capital in a decade, this has led to some teetering on the edge of potential closure or becoming targets for hedge funds like Paul Singer’s Elliott Management and Boaz Weinstein’s Saba Capital.
Historically, investment trusts gave individual investors greater access to investments across the British empire. They offer a set number of shares which investors trade among themselves without affecting the pool of cash managers at their disposal, which facilitates their investment in more illiquid assets like private equity, compared to open-ended funds.
The sector’s woes have also dragged down the broader UK equity market, with the FTSE 100 struggling to match the record highs seen in US and European indices.
Several factors have contributed to the decline in popularity of investment trusts, including higher interest rates enticing investors towards government bonds and the proliferation of alternative investment vehicles such as exchange-traded funds (ETFs).
While investment trusts hold a 27% share in the FTSE 350 index, including well-known names including Baillie Gifford’s Scottish Mortgage Investment Trust and Bill Ackman’s Pershing Square Holdings, their appeal has waned compared to the past.
Activist hedge funds are pushing for changes within the sector, with Elliott disclosing a 5% stake in Scottish Mortgage Investment Trust shortly after the announcement of a £1bn stock buyback to bolster its share price, while Saba Capital has amassed a $1.3bn stake in derivatives and shares in UK trusts.
However, challenges persist for many investment trusts, particularly in raising capital, with only two IPOs and a significant drop in secondary fundraising recorded last year.
The lack of equity raises also impacts trusts focused on green energy, potentially hampering crucial investments in the sector.
The report notes that fund managers have criticised regulatory changes, notably in fee presentation, for hindering demand, which they argue has resulted in artificial inflation of fees.
Following last month’s letter to Chancellor Jeremy Hunt by a group representing 109 trusts writing that the current set-up “cannot be allowed to continue”, the report quotes a UK Treasury spokesperson in response: “We recognise [the] industry’s concerns and are working at pace with the FCA to repeal and replace EU-inherited retail disclosure rules, including for investment trusts.”
