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Hedge funds are designed to make money whatever the market is doing. But this $1trn market is unregulated and secretive, making it hard for small investors to find funds that work for them.
Still, there is another way to take advantage of hedge funds without buying into them, says Naomi Rovnick in Investors Chronicle. Many hedge funds make their money by buying up large stakes in firms and then shaking up the management to improve the overall business, which often has the effect of pushing the share price higher.
So if you can find out where the activists are putting their money and put your money there too, you could cash in on their efforts (without having to pay their fees).
So how do you do this? By looking up the main shareholders of all the FTSE shares, says Rovnick, who did just that. Along the way, she found 12 firms that had shares owned by the most renowned activist hedge funds (Principle Capital, Laxey Partners, Polygon, Steel Partners, Millennium Partners, K Capital Partners, Highfields Capital Management and Third Point). Some of the shares have already seen significant upside in recent months, but Rovnick picked six that “should be worth following” even now.
The first is Marylebone Warwick Balfour (MWB, 148p), a real estate company that owns the Malmaison chain of hotels, as well as serviced offices. Of these shares, 23.7% are owned by Active Value and the firm “presents a very good investment case”.
Next is Freeport (FPR, 458p), another real estate group that’s 20% owned by Laxey Partners. The firm has already put a number of new provisions into place for shareholders since Laxey built its stake – and there could be more to come.
Third is Nord Anglia Education (NAE, 111.8p), now 11% owned by Principle Capital Management, something that might “force Nord Anglia into sorting its problems out”, says Rovnick.
Then there’s Lavendon (LVD, 215p), which hires out cherry pickers – a safer alternative to scaffolding. The firm is 6.7% owned by Steel Partners – it lost money last year due to overcapacity, but a takeover has been mooted. Either way, “analysts expect Lavendon to turn a profit at the end of this year”.
Fifth is battery component maker Delta (DLTA, 107.5p), which is 6.55% owned by Steel. This one has £35.5m in cash on its books, says Rovnick. Can Steel persuade it to start spending? If not, a “return of money to shareholders could be on the cards”.
The final pick is Kensington Group (KGN, 897p), with its “almost unrivalled” niche in the sub-prime mortgage market. Highfields Capital Management owns 4.19% and “seems to have spotted a bargain”.
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Annunziata Rees-Mogg
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