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.