BlackRock Hedge Selector Ltd is a closed-end investment company incorporated in Jersey. An innovative umbrella company launched on 28 September, 2009, it is structured to issue a range of classes of Feeder Fund Shares, each of which will provide investors with exposure to the performance of an investment fund managed by BlackRock, Inc. (NYSE:BLK).

According to a March 19, 2014 research note by analysts Andrew Mitchell and Martyn King of Edison Investment Research Limited, initiating coverage on the company, it had total assets of £36m on January 31 2014.

It currently offers one share class of Feeder Fund Shares – the UK Emerging Companies Share Class, the BLACKROCK HEDGE SELECTOR LTD RED PART SHS NPV (UK EMERGING CO SHS) (LON:BHUE), which invests directly into the BlackRock UK Emerging Companies Hedge Fund, a Cayman Islands domiciled Fund managed by BlackRock that has a 5 year track record and a net asset value of $906 million as of January 31st, 2014.

Investing philosophy of the underlying fund

Fund managers Richard Plackett and Ralph Cox, traditionally long-only managers, were looking to garner the superior returns from the UK small- and mid-cap area. At the same time, they sought to control risk and exploit the sector’s relative volatility, as shown in the figure below.

1-volatility BlackRock

Plackett and Cox launched the UK Emerging Companies Hedge Fund in 2004, and the fund has since met its objective of limiting market correlation and providing positive returns through periods of substantial market volatility.

“The managers of the UK Emerging Companies Hedge Fund follow a fundamental, bottom-up approach to selecting positions,” say the analysts. “For long positions they look for companies with sustainable market positions, good cash generation, healthy balance sheets and strong management.” Short positions are targeted at “financially vulnerable” companies and are established through the mechanism of Contracts for Difference.

This hedge fund has a leveraged gross position, though BHUE, the feeder fund, does not.

Top 10 long holdings

2-top-10-longs BlackRock

Why invest in BlackRock Hedge Selector and not directly in the hedge fund?

According to the analysts, the company states that it conducts its affairs in a way that would not result in it being considered a non-mainstream pooled investment, and intends to continue to do so for the foreseeable future.

It may be noted that the Financial Conduct Authority (FCA) has banned the promotion of units in unregulated collective investment schemes (UCIS) and a broad range of “close substitutes” (collectively known as non-mainstream pooled investments – NMPIs) to retail investors in the UK from January 1st 2014.

“The above model, and the listing of the BHUE shares on the London Stock Exchange, means they provide more widely accessible exposure to the strategy than direct investment in the Caymans-domiciled hedge fund itself,” explain the analysts.

Current investors in BHUE

3-investors BlackRock

Conclusion

“We conclude that the continued improvement in the UK economy should provide a gradually improving background for small- and mid-cap companies, which, as a group, tend to be more economically sensitive,” say the analysts. “After the strong absolute and relative run the sector has enjoyed, however, some investors seeking lower volatility and returns that are less market correlated may prefer the potentially less volatile hedged exposure offered by a long/short fund such as BlackRock Hedge Selector and its UK Emerging Companies share class.”

At the time of writing BLACKROCK HEDGE SELECTOR LTD RED PART SHS NPV (UK EMERGING CO SHS)(LON:BHUE) is trading in London at 139.20p.