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By Allison Bisbey Colter
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Prospero Capital Management, a Columbus, Ohio, investment firm with about $10 million under management, plans to launch three closed-end funds that will pursue hedged equity strategies similar to those the firm currently offers in separately managed accounts.
All three - the Antenor Fund, the Beaumont Fund, and the Curan Fund - will invest in the same 25 to 30 small- and mid-cap growth stocks, according to a filing with the Securities and Exchange Commission. But the Beaumont Fund and the Curan Fund will also sell stocks short, the filing said.
The firm's founder, Benjamin J. Bornstein, has been managing money for investors - many of them clients of Merrill Lynch (MER) and Credit Suisse First Boston, a unit of Credit Suisse Group (CSR) - for nearly 10 years, but decided to launch the pooled investment vehicles because it was becoming increasingly burdensome to execute trades on behalf of individual accounts.
"I realized I was spending a lot of time implementing trades rather than looking for the next good idea," Bornstein said. "Funds were the next logical step."
He said about two-thirds of the firm's assets under management in separate accounts will be rolled into the three hedge funds.
Bornstein, who is the sole shareholder of Prospero Capital, said he decided to register the hedge funds with the SEC because he wanted to diversify his investor base. Most of the firm's clients are wealthy individuals, and he would like to attract more institutional investors. Submitting the funds to regulatory scrutiny allows them to avoid restrictions unregistered funds face on the amount of money they can raise from retirement plans.
The funds also avoid restrictions unregistered funds face on the total number of investors they can solicit.
"This allows you to appeal to ERISA (Employee Retirement Income Security Act) clients, have an unlimited number of investors and still act something like a hedge fund," the manager said.
Bornstein will also have to disclose more information about the funds' holdings than most hedge funds, which could force him to make some changes in the strategies, such as the criteria for selecting short positions. "We'll have to be more careful about how liquid our shorts are," he said.
But the manager thinks most hedge funds will eventually have to disclose more information about their portfolios if they want to attract money from institutions. "I think the whole industry is moving toward more transparency, rather than less," he said.
Investment Minimum Of $500,000
The three hedge funds will focus on fast growing small- and mid-cap companies in the healthcare, financial services and consumer sectors, according to the filing. They will invest in companies with strong customer loyalty, steady revenue, a sustainable competitive advantage, potentially high cash returns on invested capital and excellent management teams that trade below the price they could command from a potential acquirer.
The Beaumont Fund and the Curan Fund will also bet on declines in stocks in these sectors that lack these five criteria and trade at a premium to the price they could command from a potential acquirer.
The Beaumont Fund will invest between 20% and 50% of the value of its long positions in short positions, while the Curan Fund will invest equal amounts of money in long positions and short positions.
Prospero's long-only strategy returned 3.5% in the first quarter and has a five-year annualized return of 19.1%, according to information posted on the firm's Web site. By comparison, the S&P 500 lost 0.1% in the first quarter and has returned an average of 9.8% a year over the past five years.
All three of the firm's hedge funds will have investment minimums of $500,000 - twice as much as Prospero required for its separate accounts, but still lower than most unregistered funds, which have investment minimums of $1 million or more.
The closed-end funds won't trade on any exchange and investors won't be able to redeem their interest until December 2002; thereafter, the adviser expects to offer to repurchase shares once a quarter.
They will charge a quarterly management fee of 1.5%, and a performance fee of 20%.
-By Allison Bisbey Colter, Dow Jones Newswires;
allison.bisbey-colter@dowjones.com; 201-938-5298
(END) Dow Jones Newswires 15-05-02
2015GMT