Quant Macro Investing

Risk Taking Disciplined

Tracking A Hedge Fund’s UK Positions

http://www.marketfolly.com/2009/09/tracking-hedge-funds-uk-positions.html

http://www.marketfolly.com/2010/01/tracking-hedge-fund-positions-in-uk.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed:+MarketFolly+(Market+Folly)

Tracking A Hedge Fund’s UK Positions

Before we continue to look at the positions prominent hedge funds hold in UK markets, we thought it would be prudent to post up an informational piece regarding the nature of the UK regulatory system as it applies to hedge fund disclosure. Firstly, there is no UK equivalent to the SEC’s 13F filing in which funds have to file their holdings on a quarterly basis here in the United States. In the UK, hedge funds do not have to file on a periodic basis at all. Instead, large shareholders are only required to flag long holdings that are greater than 3% of a company’s issued equity. This means that small hedge funds often do not register on the filing radar at all unless they invest in very small companies. Large funds on the other hand often leave a footprint and we can track their activities with ease (particularly when they are buying small and medium sized companies). Their investments in large cap companies, however, often go (legally) unreported and unnoticed because they do not trigger the 3% threshold. This is most similar to an SEC 13G filing (or 13D filing sans the activism) in the United States whereby a fund has to disclose after they have acquired a 5% or greater ownership stake in a company. We routinely cover 13G filings here at Market Folly and these UK filings can be regarded as their regulatory version of a 13G.

In the UK, once a fund crosses above 3% of a company’s equity in issue it has to report any further changes at 1% increments (regardless of whether it is a purchase or a sale). For example, if a fund moves from 3 to 4% of equity in issue or from 4 to 5, they must report. They must also report sales, for example, from 7 down to 6% until it gets below the 3% threshold where one final filing is required to acknowledge that the fund no longer has a concentrated ownership stake.

The additional filings made at 1% increments are interesting because the funds have to provide the trading date on which the threshold was crossed. This date can then be used to make a rough estimate of the price the fund was willing to pay for a company. Arguably, purchase price information is particularly useful if the fund being tracked is well known for excelling at fundamentally driven or deep value research. It is perhaps less meaningful if the fund follows momentum driven investment strategies such as those used by many Commodity Trading Advisers as these funds often move in and out of positions with much more alacrity and disregard for valuation.

Finally, just like in the United States, we can only provide information on a fund’s long positions in UK markets. Short positions do not have to be disclosed except if they are in financial companies or companies involved in rights issues. We will cover the UK disclosure rules on shorts and disclose some hedge fund short positions in a later article, so stay tuned.

Hopefully this gives everyone unfamiliar with the subject a brief background on how regulatory disclosures work in the UK. Now that we’ve presented this preface, look for more articles relating to various positions hedge funds hold in UK markets going forward.We’ve already covered Lone Pine Capital’s UK holdings, Lone Pine’s recent movements, Sprott Asset Management’s defensive UK portfolio, as well as Citadel’s positions. Then later this morning we’re also going to take a look at the UK holdings of legendary macro investor, Louis Bacon. And, as always, we’ll continue to track the US holdings of prominent hedge funds in our portfolio tracking series, so check back daily.

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Tracking Hedge Fund Positions in the UK

We had previously published a brief look at how to track a hedge fund’s positions in the UK. We wanted to update that piece a bit and break it down to make it easier to understand. After all, we occasionally cover hedge fund holdings in UK markets. Recently, we’ve detailed how hedge fund Eton Park expanded their UK positions and you can view the rest of our UK updates here. So, let’s examine how to do this:

The UK differs from the US in that disclosure is not required on a periodic basis (as in the case of disclosures required quarterly on a 13F in the US). Instead of “across the board” disclosure on a regular basis the UK system is more event driven. There are four main sets of circumstances under which investment funds and hedge funds are required to disclose long and short positions in UK listed companies.

1. Large holdings in a company

Shareholders with a substantial long position of greater than 3 per cent of a company’s outstanding equity are required to disclose it. Note that this includes rights to acquire shares via derivatives at a later date such as Contracts for Difference (CFDs) or options.

Once a fund crosses above 3% of a company’s equity it has to report any further changes at 1% increments (regardless of whether it is a purchase or a sale). For example, if a fund moves from 3 to 4% of total ordinary shares or from 4 to 5%, they must disclose the change. They must also report sales, for example, from 7 down to 6% until they fall below the 3% threshold where one final filing is required to acknowledge that the fund no longer has a concentrated ownership stake.

Large shareholders in companies that trade on the main market are required to simultaneously inform the issuer and the Financial Services Authority (FSA) of changes to major holdings using a TR-1 form. Substantial shareholders in companies that trade on the exchange-regulated markets (such as AIM or Plus Markets) need only inform the issuer of changes to major holdings in that issuer’s shares. Issuers must then disclose this information to the wider market via the Regulatory News Service of the London Stock Exchange.

2. Takeovers

Under Rule 8.3 of the Takeover Code if a fund holds 1% or more of the stock of the offeror or the offeree in a takeover all dealings (including derivatives) must be disclosed by no later than 3.30 pm (London time) on the day following the date of the relevant transaction. This requirement continues throughout the offer period. A disclosure table giving details of the companies involved in takeovers is available for the public to view on the Takeover Panel’s website.

If two or more hedge funds act together to acquire an interest in the securities of the offeror or the offeree company they are deemed to be a single entity and need to disclose as such. Under Rule 8.1 all transactions in the stock of the offeror or of the offeree company by the offeror or the offeree company must be disclosed by no later than 12.00 noon (London time) on the business day following the date of the relevant transaction.

3. Rights issues and short positions

Hedge funds that have a short position of 0.25% or greater in a UK listed company that is undertaking a rights issue are required to disclose it. The deadline for disclosures is 3.30 pm on the business day following the day the short position threshold was crossed

4. Financial companies and short positions

Hedge funds that are net short of a UK financial sector company are required to disclose the position if it is greater than 0.25% of the firm’s issued share capital. In addition, the fund must disclose each time it increases the short by 0.1% of issued share capital (e.g., at 0.35%, 0.45%). The list of companies deemed to be “fianancial sector companies” is available in PDF format on the FSA website .

We’ll continue to cover hedge fund movements in UK markets. Click here to follow our coverage on UK portfolio updates thus far.

Further Reading

Disclosure of Contracts for Difference – Questions & Answers – Version 2 [PDF]

List! Issue No. 14 – Transparency Directive – December 2006 [PDF]

List! Issue No. 14 (Updated) – April 2007 [PDF]

Additional information on the responsibilities of major shareholders is also available.

Information about third country investment manager disclosure non-EEA investment managers. [PDF]

The Takeover Panel’s website.

January 14, 2010 - Posted by | Case Study

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