Popular leveraged and inverse exchange traded fund (ETF) provider Direxion is out with a new fund that gives investors a new way to play the fast-growing global IPO market. The twist? Long/short exposure that plays on the life cycle of an IPO.
The Direxion Long/Short Global IPO Fund (NYSEArca: DXIIX) is a managed mactical fund that incorporates long/short, tactical strategies with exposure to alternative asset classes.
Direxion’s Marketing Director Andy O’Rourke points out that many investors may not be aware that, on a global level, the IPO market is growing. While the U.S. IPO market might be tepid, “If you look globally, it’s a much larger growth rate,” he says.
To put it in perspective, in 2000, there were 386 new issues around the world. Following the burst of the dot-com bubble from 2001-2003, global IPO activity cratered to as few as 59 new offerings per year. But since then, O’Rourke says, it’s been steady growth. In 2009, global IPO activity topped 400 new issues.
O’Rourke says much of the IPO activity these days is taking place in areas like India and the Far East, nations populated by companies that are servicing other companies around the world (think: outsourcing).
On the long side of the fund are China, the United States, Brazil, Hong Kong and Canada. On the short side is also China, the United States and Hong Kong, with Japan and Germany taking the fourth and fifth spots. Direxion looks at each issue individually. [Increased IPO activity? There’s an ETF for That.]
The idea behind the fund is the expectation that new issues will outperform in their first year of existence, then underperform in their second to fourth years. After the fourth year, the issue is dropped from the fund. “Looking at the price activity, you do tend to see the pattern of behavior,” O’Rourke notes.
The fund will also use short-selling to reduce overall risk associated with the IPO market.
The fund will try to capture IPO activity in three stages of life:
- Initial offer under-pricing – IPOs are often priced below the market’s initial expectations.
- Year 1 over-performance – analysts reports for value measurement and exaggerated market expectations may generate high returns.
- Post year one under-performance – many companies struggle to live up to initial expectations.
Why might you be interested in the fund?
- The fund provides diversification through exposure to another asset class.
- It provides a potential hedge against adverse market conditions.
- IPOs are considered a non-correlating asset class.
- IPOs tend to issue cheaply, so they provide a “down” market protection for the first 12 months.
- Tactical management that provides returns through the three phases stated above.
- Exposure to broad, global IPO syndicates.
For more information on the IPO market, visit our IPO category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.