Written for The Independent on Sunday, Mar 18, 2007 by Maggie Lee.

Colin Kingsnorth, the cofounder of Laxey Partners, is keen to set the record straight about the secretive nature of hedge funds.

“Contrary to popular belief, we adopt a Warren Buffett approach, investing in undervalued companies as opposed to underperforming ones,” he says. “We’re also very open with our clients. They see the good, bad and ugly in our portfolio. It’s not a black box – clients know exactly what we’re doing.”

Kingsnorth has good reason to argue that his industry is doing its best to be open. As billions of pounds continue to pour into private equity and hedge funds, European regulators and UK trade unions are lobbying for firms to be more transparent about their activities. Industry tracker Hedge Fund Research estimates that around $1.5 trillion ([pound]770bn) is invested globally in hedge funds alone.

The growth of these funds, and the veil of secrecy shrouding their complex and unrestricted investment strategies, po-larise opinions. Descriptions range from “short-term lords of havoc” to “professional and competent investors who keep us [chief executives] on our toes”. Hedge funds’ historic resistance to demands that they should be publicly accountable does-n’t help matters.

As an active investor who buys stakes in target firms with the aim of promoting reform, Kingsnorth is no stranger to controversy. In the past six years, the self-styled corporate crusader has had Wyevale Garden Centres, British Land, TR Property Investment Trust and Private Equity Investor in his sights. His modus operandi often results in the reorganisation of boardrooms and the sale of property portfolios to increase shareholder value.

Kingsnorth is also accused of using confrontational tactics to remove directors who are perceived to be underperforming. Such charges do not worry the hedge fund boss.

“If people are concerned about negative press, just roll the clock forward a few years and look at the results. See how the assets are managed then – how people are performing. The results always speak for themselves.” Kingsnorth, now in his mid-40s, has over 20 years’ trading and investment experience in the City. In 1999, along with his partner Andrew Pegge, he founded Laxey Partners, raising capital for Value Catalyst, Laxey’s only listed fund. (The firm, which is registered offshore in the Isle of Man, takes its name from a Manx village.)

Alongside Value Catalyst, listed on the Alternative Investment Market, Laxey has established a variety of private closed investment funds over the past eight years. The firm has offices in the Isle of Man and in central London and currently employs around 20 investment professionals. It has $2bn of funds under active management.

Precise figures for the total size of investments in hedge funds can be difficult to obtain as firms are under no obligation to reveal detailed information to those outside their circle of investors. Funds are open only to a limited number of accredited investors and are lightly regulated.

Their attraction lies in the potential returns, for unlike traditional funds – mutual and pension funds and insurance companies – hedge funds are not restricted in their investment activities. Average returns are currently estimated to be in the region of 19 per cent.

While hedge funds can invest and specialise in a diverse range of assets, Kingsnorth agrees that the term is often used generically to describe a private investment fund that is typically organised as a limited partnership. Fund managers are usually compensated by charging a performance fee (estimated to be around 20 per cent of profits) and a management fee (typically around 1 per cent of assets under management).

Kingsnorth says: “Laxey has one of the lowest fee structures in the hedge-fund world. We tend to put benchmarks and hurdles in our funds because we think that’s equitable.”

He defends the industry’s large remuneration packages on the grounds that the calibre of people employed is critical to its success, particularly as returns are determined by a manager’s ability to spot an opportunity. As a result, however, there is inevitably a brain drain from the traditional fund managers that look after the bulk of our pension funds.

Kingsnorth is unequivocal in his assessment of talent: “If you were to randomly select 500 hedge fund managers and compare them with 500 traditional fund managers, I’d feel extraordinarily confident that the hedge fund managers would be better qualified, more numerate, work longer hours and conduct more diligent work.

“You could argue that what we do embarrasses the traditional fund management world, as it generally doesn’t perform as well as us. However, it’s foolhardy to be over-critical of these institutions, as many are clients investing over 10 per cent of their capital in hedge funds.”

And does he believe stellar returns are sustainable? “While hedge funds can help make markets more efficient by trading on deficiencies, you can’t go on doing that ad infinitum. Intuitively, one has to think that at some point the spectacular returns some funds have shown will fall.” For now, though, he is confident that the only way is up.

Read the article here.

Copyright 2007 Independent Newspapers UK Limited