Direxion Readies First Long/Short IPO Fund | Web
02/12/2010
Fund Action
Schnitzel, Mike Direxion Funds plans to launch the first mutual fund that will take long and short positions in initial public offerings. The Direxion Long Short Global IPO Fund will track the lifecycle of IPOs during their first four years of existence and take long or short positions based on that timeline, Andy O’Rourke, marketing director, told FA. Russel Kinnel, director of mutual fund research at Morningstar, said the fund’s strategy is a first of its kind for the industry. “I’ve never heard of anything close to that,” Kinnel told FA. “There were a couple of IPO funds back in the intense IPO mania of the ’90s…They didn’t do well because, number one, IPO launches tend not to do well over the long term and, number two, buying IPOs in ‘99 and 2000 was buying the worst junk, bubble prices.” Kinnel said it is a positive that the fund’s strategy acknowledges that, “in general, IPOs are not the greatest investment and [the fund’s strategy] implies there is often an underperformance later on.”
O’Rourke noted that many IPOs tend to outperform over the first year. “It’s based mainly on analyst reports on how they expect the issue to perform and so they are often overvalued during the first six to 12 months of existence,” he said. “During the second through fourth years, many tend to underperform because there are real earnings reports out, and if they’re not living up to analyst expectations, their value is down.”
Armed with that approach, the fund’s managers will take long positions in first-year IPOs they find attractive and select a group of IPOs they expect to underperform during years two through four, and short those. The fund will be subadvised by IPOX Schuster, a firm that specializes in designing products focused on IPOs and spinoffs, O’Rourke said.
O’Rourke added that the fund is intended as a tactical investment vehicle and will benefit from active management. “[IPOX Schuster] are authorities on the behavior of IPOs,” he said. “They are in a position to understand which IPOs are expected to perform well and make decisions on an active basis, rather than just track an index.”
Joseph Schuster and Darren Fabric will manage the fund, which will have 190 basis points expenses. –Mike Schnitzel
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