Hedge fund at a discount

Hedge fund at a discount

It’s been a long time since I’ve read about a stock that’s got me excited, but a post on Oddball stocks yesterday did just that. In his article, Nate highlights a great potential investment in a hedge fund management company, Senvest (SEC.TO), whose assets are invested in their own fund and currently sell at a discount to book value per share. Not only that, but the hedge fund itself is rather good and has performed well for investors over the last 10 years.

This sounded like a win win win situation to me.

Win 1: Invest in a great hedge fund

Win 2: Get a discount on management fees, as you’re a stockholder in the management company!

Win 3: Pay $83 for investment and you get another $34 thrown in for free!

But hold on!

Before you rush off to buy this, after a little digging myself I found that the returns aren’t quite as attractive as at first glance. Book value has grown at a compounded rate of 22.5% since 2004. BUT in 2005 there was an accounting change which remeasured their financial assets to fair value. Before this, they had unrealised gains which weren’t recognised in the balance sheet. If you look at book value per share growth since 2005 instead, it reduces to growth of 12.7% per annum compounded.

You can check out their annual reports here, the 2005 report gives more information on the revaluation.

YearBook Value PSAnnual Change
200550.77-
200658.41+15%
200762.76+7%
200837.01-41%
200987.98+138%
2010120.00+36%
201193.44-22%
2012117.51+26%

The funds are no stranger to large drops in value either, seemingly following market trends although showing strong rebounds, capitalising on opportunities in the market. Their shares have also consistently traded at a discount to NAV, so don’t expect the gap to narrow anytime soon.

OK now you can go!

Ok so 12.7% isn’t 22.5%, but it’s still decent, and you are getting a margin of safety on your investment. With the market at all time highs, there may be a better buying opportunity in the future if their NAV reduces, but I’ll be building up a small position in the meantime, ready to bet more heavily if the markets in general suffer (fingers crossed!)

p.s. my regular Weekend Stock article will be posted tomorrow (Saturday) rather than today

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Investing Sidekick

Founder of Investing Sidekick. Works as a research analyst and is an avid value investor, always searching for undervalued shares. An SA certified writer.

3 Responses to Hedge fund at a discount

  1. juan says:

    Well spotted!

  2. Steven says:

    Do you still think the stock is trading at a discount?

    • Investing Sidekick Investing Sidekick says:

      It’s rallied a lot since this post. At the time of posting it was around $0.75, and it now trades at $1.35 so I think it’s definitely less attractive now.

      I never initiated a position in this stock, and can’t remember why now. It was probably because my broker didn’t have it available but obviously I’m kicking myself that I missed out on this great opportunity though!

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