Institutions that invest in offshore hedge funds will have an Internet alternative this January.
HedgeWorld Ltd., Bermuda, which operates the Web site Hedge-World.com, has announced a joint venture with the Bermuda Stock Exchange Ltd. to form the HedgeTrust Exchange, which will match buyers and sellers and handle trades in non-U.S.-domiciled hedge fund interests over the Bermuda Stock Exchange.
A HedgeTrust Exchange tab on the site will allow accredited investors to enter buy and sell orders.
Jeff Landle, managing director of alternative investments for The Commonfund Group, Wilton, Conn., said, "it's a new development and one which we'll watch with interest. We haven't looked at it closely enough (yet) to say whether we would or wouldn't use it."
But, he added, "I'm not sure hedge fund managers will like it. They have had the ability to control their client base and with this they'll lose it."
Indeed, a source close to several hedge fund organizations, some of which have offshore funds, said he thinks many won't participate in the service. "Many hedge funds like to control the investors in their funds. If there's a secondary market -- and that's what this is -- they won't like it. Hedge funds like longer-term investors. That's why they have lockup clauses. They don't want investors who can just jump out," he said.
An official with one of the largest pension funds in the United States, who did not want to be named, said "anything that brings liquidity to hedge funds is a positive development for the industry."
But, he said, certain strategies, including absolute return and market neutral, "demand a level of insight that comes from one-on-one meetings with the manager." For this reason, he thinks many pension funds could be reluctant to buy hedge fund interests on the open market.
Various responses
Johann Wong, president of HedgeWorld, said he's "gotten all types of responses" from hedge funds, some of which want to be traded on an exchange and some of which don't. He believes enough hedge funds will go along to make the project succeed.
Mr. Wong also said that there is clearly an opportunity to provide services to the hedge fund market, pointing out that "informal trading" of interests in offshore hedge funds is already taking place. He mentioned George Soros' Quantum Funds as one such group in which much informal trading now takes place through private banks and brokerage firms working for hedge fund clients, rather than for the hedge funds themselves.
The intermediaries that now bring buyers and sellers together include brokerage firms and offshore private banks, including some Swiss-based private banks.
HedgeWorld will work with the Bermuda Stock Exchange because "we felt the need to align ourselves with a regulated body because of the privacy and secrecy" that surrounds this market, said Mr. Wong.
The Bermuda Stock Exchange is regulated by the Bermuda Monetary Authority and recognized by the U.S. Securities and Exchange Commission as a Designated Offshore Securities Market under Regulation S of the Securities Act of 1933.
"With the growing institutionalization (of this business), buyers and sellers want a regulated environment," he added.
Through the HedgeTrust Exchange, investors will be able to trade interests in hedge funds that are listed on the Bermuda Stock Exchange and some that are not listed. For those not listed, hedge fund managers must consent to the transfer between buyer and seller.
Mr. Wong also said the "vast majority of offshore hedge funds are sold on a per-share basis, known as `net asset value per share.' "
The trades will go through FITX Capital Ltd., an affiliate of HedgeWorld, which is a trading member of the Bermuda exchange and will provide crossing and reporting facilities to the exchange. FITX also will list hedge funds on the exchange.
Although hedge funds do not have to use FITX, they must go through a trading member of the Bermuda Exchange in order to be listed on it.
U.S. funds can use service
U.S.-based pension funds and other tax-exempt institutions will be able to trade through either the Web site or Tremont Securities Inc., Rye, N.Y., a registered broker-dealer and a wholly owned subsidiary of Tremont Advisers Inc., also of Rye, which is an investor in HedgeWorld.
This would enable U.S. pension funds, which may have restrictions on how and where they can trade, to use the service.
Mr. Wong said the firm would not announce the cost of trading until it is ready to launch the site.
HedgeWorld is not the only firm interested in bringing hedge funds to the trading floor. Tuna Group LLC, Locust Valley, N.Y., and its affiliate HedgeFund.net also have announced plans to launch an Internet-based trading system for off- shore hedge fund investors.
HedgeFund.net does not have a strategic partner to handle the actual trading of the securities. Alex Shogren, founder and CEO of Tuna and HedgeFund.net, admitted his Oct. 20 "pre-announcement" of his firm's plans was in response to HedgeWorld's Oct. 19 announcement.
