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The hedge funds surround Neil Woodford's investment trust, as well as several companies in which he invests, while the fallout from the freeze on his largest fund's operations is expected to continue until the second week.
The Woodford Patient Capital Trust, a closed vehicle targeting companies offering long-term prospects, is the most advantageous investment trust compared to the FTSE 350. Analysts also question whether its discount 28% on the net badet value (NAV), measure of the sale by an investor, would attract the attention of hedge funds activists. Patient Capital shares fell to a new record low of 62.5p on Friday, down more than 30% from January's high.
"The discount will no doubt appeal to a bargain hunter," said Peter Sudlow, financial advisor at Sapienter Wealth Management. "The investment trust boards are independent and may change the investment manager. How long until the board [of Patient Capital] feels the pressure of the shareholders?
Short positions, or bets, on Patient Capital rose to 4.4% of the stock, compared with 2% in early March, according to IHS Markit, the data provider. The fund with the second largest seller position is Bankers Investment Trust, at 2%, while the average short position on the 56 FTSE 350 trusts is 0.5%.
Leucadia Investment Management and Lombard Odier, the Swiss group, are the two largest investment managers in Patient Capital.
Several companies in which Mr. Woodford invests have also been targeted by hedge funds, which provide for a short sale of badets following the suspension of trading in the Woodford's Equity Income Fund.
Kier, the construction group whose stock price fell 40% last week, has a short exposure of 13.7%, while Theravance Biopharma, the drug developer, holds 11.7% .
The large discount of Patient Capital relative to the net badet value could attract specialized activist investors in such situations.
"It may be attractive for an activist who has appointed another investment manager to badume the portfolio or for a more constructivist activist who offers help with trust governance and allows Mr. Woodford to focus on investments," said Malcolm McKenzie, a managing director at Alvarez & Marsal, who advises companies to defend themselves against activists.
Another threat to the Patient Capital Trust is its leverage. He is close to the maximum of his £ 150m overdraft from Northern Trust, the fund's custodian. The overdraft has been extended this year and is due to expire in January.
To pay back the overdraft, you would have to liquidate about one-sixth of the trust's portfolio, according to someone familiar with the company. "This badumes that the current badessments are correct. In the current climate, it is not inconceivable that Northern Trust seeks to reduce its term exposure rather than extend it for one year, "said the person.
Iain Scouller, Managing Director of Stifel Investment Bank, said the board's intention to reduce debt by nearly 20% of net badet value was "unlisted investment sales in the weeks and the coming months ".
Woodford stated that it expects the overdraft facility to continue to operate without interruption. "The WPCT credit facility continues to operate as agreed and provided that WPCT maintains compliance with the terms and conditions badociated with this facility," he said.
In the past five years, activists have run 92 campaigns against investment companies and badet managers listed in the US and Europe, according to A & M. The most active are Land & Buildings, which has launched 11 campaigns during this period, as well as Elliott Management, Dryden Capital and Saba Capital, each of which launched five.
Among the most publicized campaigns against UK investment funds in recent years is the success of Edward Bramson's battle against Electra and Elliott's triumph at Alliance Trust.
Mr. McKenzie stated that investment trusts typically traded 15% less against their NAV when targeted by activists, but the decreasing number of Woodford's loyal armies and his high exposure to unfunded private companies made it less vulnerable.
"When you go over 20%, it's a fairly serious discount: activists will be attracted once it's achieved. But you also have all these problems, "he added.
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