Mutual fund heavyweight Legg Mason has applied to the US Securities and Exchange Commission for exemption from certain restrictions on closed-end funds. If granted, the exemption would allow Legg Mason’s hedge fund investment subsidiary Permal to offer closed-end funds with multiple share classes.
There are many hedge funds that offer share classes with different fee and liquidity conditions but those are not US registered vehicles. Legg Mason wants to be able to institute different types of shares for products that are registered under the 1940 Act and like mutual funds under that US law offer shares continuously to investors. Managed by Permal, the vehicles invest in outside hedge funds.
Their key difference from mutual funds is that the underlying hedge fund portfolios are not liquid enough to allow daily redemption and investors cannot redeem except at certain times when the manager offers to buy a limited amount of shares. Legg Mason does not expect to list these products on an exchange, so there will no established secondary market for the shares.
Mutual funds can issue two or more types of shares for the same underlying portfolio. But closed-end funds need an exemption to do this. The SEC has already given such exemptions, for instance to a fund of hedge funds belonging to Man Group. Legg Mason argues that if it set up separate funds to achieve the same result rather than create multiple share classes, costs would be higher for shareholders.
Tags: Legg Mason, Man Group plc, Permal Group
HedgeFundSmarts 
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