Investment manager L1 Capital has launched a prospectus for a listed investment company that will mirror an established long-short equity fund that has produced returns of more than 30 per cent year over the past few years.
L1 is seeking $500 million for the L1 Long Short Fund Ltd. The offer closes on April 6 and the LIC is expected to list on April 24.
The LIC will invest in a portfolio of predominantly Australian and New Zealand securities, with up to 30 per cent exposure to global securities.
The LIC will mirror the L1 Capital Long Short Fund, which has produced an average annual return of 36.9 per cent since it was launched in 2014. That fund is closed to new investors.
Last year, the fund was awarded best Australian alternative strategy by investment researcher Zenith.
L1 Capital was founded in 2007 by Raphael Lamm and Mark Landau, who are joint chief investment officers. They currently manage around $3 billion of funds.
According to the prospectus, the fund’s high returns have been generated with significantly less volatility than the volatility of the S&P/ASX 200 Accumulation Index.
Since the established fund was launced in 2014, there have been 23 positive months for the S&P/ASX 200 and 17 negative months (up to December). The fund had only four negative months over that period.
“This demonstrates the historical downside protection of the investment strategy and its capital preservation benefits,” the prospectus says.
The fund’s standard deviation since inception has been around 8 per cent, compared with more than 11 per cent for the S&P/ASX 200.
The investment focus will be on producing risk-adjusted capital gains, rather than high dividend yields. The manager expects that there will be periods when no dividends are paid.
Typically, the fund will invest in between 50 and 100 positions (both long and short) but its investment strategy does not require a minimum or maximum holding. There are no sector or geographic limitations.
The fund may use derivatives and it may borrow. The prospectus says: “The use of derivatives and short selling may have an effect similar to debt leverage in that it can magnify the gains and losses achieved in the portfolio in a manner similar to a debt leveraged portfolio.”
The company’s “gross exposure”, equaling the sum of long and short positions, is greater than the amount of investors’ capital. This creates leverage. There will be a maximum gross exposure of three times the portfolio NAV and a maximum net exposure of 1.5 times NAV.
The company will engage in short selling by borrowing securities from a prime broker and selling them.
A short sale occurs when the portfolio manager borrows security from the company’s prime broker and sells the security to a third party, generating cash proceeds. The manager will reacquire the same security on market and return it to the lender to close the transaction. The company makes a profit if the price of the borrowed security falls in value in the period between when the manager short sells the security and when the borrowed security is reacquired.
The company will suffer a loss if the borrowed security increases in value during the transaction period. Short selling involves greater risk than buying a security because losses can continue to grow during the transaction period.
While the risk of loss with a long-only strategy is limited to the amount invested, losses on a short position can be greater than the purchased value of the security.
Short selling can often reduce risk by offsetting losses on long positions, it is also possible for long positions and short positions to lose money at the same time.
The management fee is 1.4 per cent and the performance fee is 20 per cent of the portfolio’s performance, with underperformance carried forward.
The manager has committed to reinvest performance fees.
The fund manager will reimburse the LIC for all set-up costs incurred, foregoing management fees that would otherwise have been payable. In addition, the manager will pay for the majority of the LIC’s ongoing operating costs.
