The fortunes of multi-award-winning hedge fund managers Andrew and Philip King seem to be going from bad to worse following their former board colleagues’ revelations of a query by ASIC over trading in a resources stock in 2013. Are they being punished for being clever?
Andrew, the chief executive, and brother Philip, the chief investment officer, of Regal Funds Management, had received a ‘please explain’ notice by ASIC, in the form of a civil hearing under the Corporations Act, over activity in the junior miner Syrah Resources in 2013.
Regal is an affiliate of Westpac’s multi-affiliate manager Ascalon, which owns 30 per cent of the long/short manager, and two of the directors – David Lees and Chuak Chan – were Ascalon appointees. The other two directors were the Kings.
Then, three things happened: Lees and Chan resigned from the board and in doing so revealed that ASIC investigation; the Westpac-owned Asgard pulled its funds from Regal, said to be about $70 million; and, Regal decided to make an interim distribution of other funds to protect the interests of all its investors. The size of that distribution is not known, but it is unlikely that there will be much left in the former $100-million Regal Long/Short Australian Equity fund.
What has surprised the funds management community is the resignation of the Ascalon-appointed directors. ASIC investigations such as this are not uncommon and fund managers are not obliged to reveal their existence until after the results are known.
However, according to a report in Business Insider Australia last week, a letter to unitholders from Regal’s chief operating officer, Stephen Baldwin, said: “There was a difference of opinion on the board as to whether immediate notification of the notice of hearing was warranted or whether further information and advice should be obtained. As a consequence, Mr Chan and Mr Lees resigned from the board.”
Because there was a significant reduction in the investor base, “the fairest thing to do was to make sure all investors share in the income so no-one gets an adverse tax outcome”, Baldwin is quoted as saying in reference to the latest distribution.
Andrew Main, business editor, wrote in ‘The Australian’ on June 13 that Regal was shorting Syrah Resources when it fell by 43 per cent over a few days in March and April 2013. It subsequently recovered but not before about $30 million had been wiped from the capitalisation of the thinly traded small-cap stock. Syrah Resources’ broker was Credit Suisse which had issued what were known as “mini warrants” over the stock, which is what Regal traded, probably giving its own investors and shareholders a very profitable position as the price went down and as it went back up.
Main wrote that Regal had been a keen buyer of Syrah Resources stock. He said that ASIC would likely be looking for evidence of market manipulation or collusion.
From the perspective of the funds management community, the broader and more important question goes to the rights and responsibilities of directors. It is unknown whether Asgard would have known about ASIC’s investigation if the Ascalon-appointed directors had not resigned, but it is fairly certain that other investors would not have – at least until the investigation was completed.
If the ASIC investigation reveals nothing of note and yet Regal’s Aussie equities fund fails to recover from this blow, there will be a lot more questions and accusations being thrown around the industry.
Regal has several award-winning domestic and international funds. Last year the manager’s Regal Atlantic Absolute Return Fund won ‘hedge fund of the year’ and ‘best long/short fund’ at the AIMA Australia Awards and the Regal Tasman Market Neutral Fund won the ‘best market neutral fund’ award. Its Amazon Market Neutral Fund also won a HFM Awards Asia 2014 performance award.
* Greg Bright is publisher of Investor Strategy News (Australia)