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Permanent vs transient capital

August 03, 2011 | About:

Investing is a tough business. Hedge funds do not have permanent capital, which is why listed investment vehicle may prove to be an attractive alternative for hedge funds.


For the investment manager, a listed investment vehicle provides the ultimate lock-up period for committed capital – it is by definition permanent. For the investor it provides the liquidity normally associated with an open-ended vehicle, provided by trading units in the fund in the secondary market, rather than by regular redemption opportunities provided by the vehicle itself. (Source: http://www.ogier.com/publication%20library/Permanent_Capital_Listed_Investment_Funds.pdf)

See my own take in Hedge Funds Going Public: http://www.gurufocus.com/news/139848/hedge-funds-going-public

I will certainly be interested in the launching of Bill Ackman’s closed end hedge fund. Bill Ackman epitomizes the alpha male gentleman, which is somewhat of a rare species these days. But I digress.

Also, Tired Of Fickle Capital And Passionless Investor-Gnats, Bill Ackman Mulls $3 Billion Fund IPO: “If we could increase the amount of our capital that is permanent, it would enable us to be more opportunistic during times of market and investor distress, and would also enable us to take larger stakes in a greater number of holdings,” Ackman wrote in the letter…Pershing Square manages about $10 billion, up from $8.6 billion on January 1. In his May investor letter, Ackman notes how much of that sum—about 10% to 15%—must be held in reserve against possible redemption requests. Despite the increase in assets, he is unable to invest as much as he would like given the assets held in reserve.

Alternatively, one may consider investing with specialty property and casualty reinsurer like Berkshire Hathaway (BRK.B) and Greenlight Capital Re, Ltd (NASDAQ:GLRE), a unique business model with permanent capital. See the reason why Warren Buffet gave up his successful hedge fund business: The Next Berkshire Hathaway First, an explanation. There’s a big reason Warren Buffett gave up his hedge fund business in 1969 in order to focus on the insurance business of Berkshire Hathaway. Think of it this way: a hedge fund manager makes money by taking 20% of the profits on the money he invests for his clients. An insurance business is almost the same model with two small differences:- an insurance company takes 100% of the profits on the money they invest - the customers of an insurance company never want to get their money back (as opposed to a hedge fund where ultimately you have to return the money to your investors). People hand their money over every month and pray they never get sick enough to warrant getting that money back. The insurance company gets to hold onto the money as long as possible and take all the profits it makes by investing that money. Insurance companies are enormous regulated hedge funds with much greater potential for immense profits. Buffett realized this early on and then became the best insurance-company manager on the planet.

David Einhorn & Greenlight Re: Greenlight Re is not a mutual fund nor is it an ETF. Instead, it has some similarities — but differences too — with Berkshire Hathaway (BRKB), Warren Buffett’s company. One similarity is that Greenlight Re is an insurance company as is Berkshire. Greenlight Re is also led by an astute investment pro, David Einhorn. Einhorn is a hedge fund manager and a contrarian who correctly foresaw the fatal weaknesses in Lehman Brothers and other financial companies. Just as Berkshire is a way to piggyback on the investment skills of Warren Buffett, Greenlight functions in a similar fashion as a way to access Einhorn’s strategies.

Do share your thoughts below.

Disclaimer: Italics are copied in verbatim.

About the author:

Graduated with BA Economics from National University of Singapore. Passed Level 1 of the CFA examination and CAIA Level I Candidate. Long-biased US equities, with strong focus on small to mid-cap stocks (NYSE, NASDAQ, AMEX, OTC & ADR) utilizing fundamental and technical analysis.

Agnostic investor, trader, writer and perpetual student of the market.

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